With an aim to encourage investments in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), the Securities and Exchange Board of India (SEBI) has amended the SEBI (Real Estate Investment Trusts) Regulations 2014 (REIT Regulations) and the SEBI (Infrastructure Investment Trusts) Regulations 2014 (InvIT Regulations), which were notified on 27 December 2017.

A snapshot of the amendments is as follows:

  • Borrowing options expanded for REITs and InvITs:  Prior to the amendments, REITs and InvITs were not allowed to issue debt securities of any kind. REITs and InvITs, whose units are listed on a recognised stock exchange, have now been allowed to raise funds by way of issue of non-convertible debentures and bonds. However, such debt securities must not have a convertibility option attached to them. To this effect, the SEBI (Issue and Listing of Debt Securities) Regulations 2008 (ILDS) has amended the term ‘debt securities’ to mean debt securities which create or acknowledge indebtedness and include bonds and other securities issued by a trust registered as a REIT or a InvIT or any statutory body, but excludes bonds issued by the government, security receipts or securitised instruments. Such debt instruments issued by REITs and InvITs are required to be compulsorily listed on a recognised stock exchange.
  • Strategic Investors defined under REIT Regulations:  Earlier, the concept of ‘strategic investors’ existed only under the InvIT Regulations and disclosures were required for commitments received from strategic investors in the offer documents for issue of units. The REIT Regulations have now been amended to allow ‘strategic investors’ to invest in the public issues of units by REITs. ‘Strategic investors’ have been defined to include an infrastructure company registered with the Reserve Bank of India (RBI) as a non-banking financial company (NBFC), any scheduled commercial bank, any multilateral or bilateral development financial institution, a systemically important NBFC registered with the RBI and a foreign portfolio investor. This is a similar list of investors as defined under the InvIT Regulations. Further, REITs are required to disclose any commitment received from strategic investors in the initial or follow on offer document for the issue of its units.
  • Minimum holding norms relaxed for REITs:  Earlier, the REIT Regulations stipulated that a REIT shall hold a minimum of 2 projects and not more than 60% of the value of its assets shall be held in a single project.  By way of the amendments, the SEBI has now allowed REITs to utilise a single asset across 2 projects and has done away with the requirement of having a minimum of 2 assets for a project. Previously, only the InvIT Regulations had allowed InvITs to hold a single asset project either through a holding company or through a SPV.
  • Lending to underlying holding companies/SPVs permitted for REITs:  Earlier, only the InvIT Regulations allowed InvITs to on-lend to their underlying holding company or SPVs. The REIT Regulations have now been amended to allow REITs to lend to their underlying holding companies or SPVs. Further, the SEBI, at its board meeting on 28 December 2017, has approved changes to the REIT Regulations to allow REITs to invest at least 50% stake in their holding companies or SPVs and allowing their holding companies to invest at least 50% stake in SPVs, subject to certain safeguards which include the requirement of REITs to have the ultimate holding interest of atleast 26% in the underlying SPV and appointment of directors on the board of the holding company or the SPV (in proportion to the shareholding) by the REIT in consultation with the trustee. The changes also seek to harmonise terms and definitions in the REIT and InvIT Regulations by minor changes to the definitions. These changes are expected to be notified soon.

Apart from the key changes above, the holding period of compulsory convertible securities in holding companies and/or SPVs (against which such units have been received) shall be considered for the purpose of calculation of one year for units to be offered to the public in case of an initial public offer by REITs or InvITS. Earlier, this benefit was available only for equity shares or partnership interest in an LLP.

Further, the definition of ‘valuer’ has been amended under both the REIT Regulations and the InvITs Regulations to be aligned with the definition of ‘registered valuer’ as defined under section 247 of the Companies Act, 2013.

Comment

While such trust structures are widely popular in the European and American markets, REITs and InvITs did not have an enthusiastic launch in India. Since the introduction of the REIT Regulations and the InvIT Regulations, only a handful of InvITs such as IRB InvIT Fund and Indiagrid Trust and have been listed. No REITs have been listed on any stock exchange. It is expected that the new norms introduced by the SEBI could facilitate growth and boost the popularity of such trust structures in India.