Fresh set of conditions for strategic investments in REITs and InvITs

By Saloni Mathur , (finserv@vinodkothari.com)

The SEBI vide its circular dated 18^th January 2018[1](‘Circular’) issued guidelines on participation by the strategic investors in InVIT’s and REIT’s. These guidelines have been issued in pursuance to the powers conferred on SEBI as per the provisions of the section 11(1) of the Securities and Exchange Board of India Act, 1992(‘SEBI Act’) read with regulation 33 of the Securities and Exchange Board of India (Real Estate Investment trusts) and (Infrastructure Investment trusts) regulations, 2014.[2]

This circular seeks to give clarifications on the participation by the ‘strategic investors’ in the public issue of the REITs and the InVITs. The board through the implementation of the ‘circular’ seeks to regulate and promote the interests of the ‘strategic investors’.

‘Strategic investor’ has been defined in Regulation 2 sub regulation 1 clause (zza) which means:

1. an infrastructure finance company registered with Reserve Bank of India as a Non-Banking Financial Company;
2. a Scheduled Commercial Bank;
3. an international multilateral financial institution;
4. a systemically important Non-Banking Financial Companies registered with Reserve Bank of India;
5. a foreign portfolio investors, who invest either jointly or severallynot less than five per cent. of the total offer size of the InvIT or such amount as may be specified by the Board from time to time subject  to  the  compliance  with  the applicable  provisions, if any, of the Foreign Exchange Management Act, 1999 and the  rules or regulations or guidelines made thereunder.

Here in this write up we intend to cover the contents of this circular at length.

• Holding requirements:

The circular states that the strategic investor(s) shall, either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.

The principal regulations earlier provided for only the minimum holding requirements but this circular has gone one step ahead and prescribed the upper limit as well. The idea is to encourage retail investments in the infrastructure sector.

Therefore, the situation with respect to holding of units stands as:

1. Holding by strategic investors – Minimum 5%, maximum 25%.
2. Holding by public, other than strategic investors and sponsors – Minimum 25%
3. Holding by sponsor – Minimum 5%, maximum 70%

• Issue price of the units and utilisation of funds:

In order to protect the interest of the investors, a pricing cap has been introduced. As per the circular, the price at which units are offered to the strategic investors must not be less than the price determined in the public issue.

If there is a situation where the price at which the units are subscribed turns out to be lower than the price discovered in the public issue, the investor shall have to chip in further funds within 2 working days from the date of public issue. However, if the price determined in the public issue turns out to be lower than the price at which the units are offered to the investors, the investors shall not be able to claim back the excess amount paid.

This can be illustrated with the help of the following:

Further, this circular provides that it must be ensured that the subscription amount is kept in the separate account until the public issue is opened.

• Lock-in period

The units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue. The intention is to avoid early exit from investment by the strategic investors, which can turnout be prejudicial to the interest of the public unit-holders.

Conclusion

It is well acknowledged that considering the huge demand in the infrastructure sector in India, REITs and InvITs have superb potential. However, since their introduction in 2014, none of them have been able to live up to the expectations. In funds like REITs and InvITs, which are new structures in the capital market, strategic investments play a very important role to gain trust of the retail investors. This move of SEBI aims to make these structures popular in India and is largely in the line with government’s focus on infrastructural development.

[1] https://www.sebi.gov.in/legal/circulars/jan-2018/participation-by-strategic-investor-s-in-invits-and-reits_37454.html

[2] https://www.sebi.gov.in/sebi_data/attachdocs/1411722678653.pdf