Dawn for REITs in India: SEBI issues consultative paper on Draft SEBI (Real Estate Investment Trust) Regulation, 2013

SEBI has finally released the CONSULTATIVE PAPER on the draft regulation for paving the way for the introduction of Real Estate Investment Trust (REIT) in India. SEBI had, in 2008, issued the first draft regulation for introduction of REITs but since then nothing happened. Finally, SEBI has woken up and issued a consultative paper in order to introduce REITs.

Now, let’s understand what exactly REIT is and how it functions. Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Further, these REITs are publicly traded on recognized stock exchanges. Globally, REITs have been a key driver towards development of the real estate sector, by providing a platform for retail and institutional investors to invest in real estate properties, with the benefits of a regulated structure and risk diversification. The opportunity to take an interest in completed and yield generating real estate assets with the option to obtain regular flow of income from REITs, makes them a popular instrument amongst investors.

STRUCTURE OF REIT IN INDIA

The draft regulation envisage a REIT as a trust set up under the provisions of the Indian Trust Act, 1882 which would raise funds through an initial public offer and be listed on stock exchanges. Further, REITs are required to invest at least 90 % of their funds in completed and rent generating properties. Also, the roles and responsibilities of various key parties to a REIT such as Trustee, the sponsor, the manager and the Principal Valuer appointed by manager are set out in detail.

PROPOSED REGULATORY FRAMEWORK OF REIT AS SET OUT IN DRAFT REGULATION

Considering the important role that REITs play, a separate regulatory framework under draft SEBI (Real Estate Investment Trusts) Regulations, 2013 (referred to as "Regulations" hereafter) has been proposed for introducing REITs in India. Salient features of the proposed framework are as under:

A. STRUCTURE OF THE REIT

(i) The REIT shall be set up as a Trust under the provisions of the Indian Trusts Act, 1882. REITs shall not launch any schemes.

(ii) The REIT shall have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer.

B.  REGISTRATION OF REIT

(i) The Trust shall initially apply for registration with SEBI as a REIT in the specified format. It shall fulfill eligibility criteria as specified in the draft Regulations.

(ii) SEBI, on being satisfied that the eligibility conditions are satisfied, shall grant the REIT certificate of registration.

C. OFFER OF UNITS TO THE PUBLIC AND LISTING OF UNITS

(i) After registration, the REIT shall raise funds initially through an initial offer and once listed, may subsequently raise funds through follow-on offers.

(ii) Listing of units shall be mandatory for all REITs. The units of the REIT shall continue to be listed on the exchange unless delisted under the Regulations. Provisions for delisting have also been specified in the Regulations.

(iii) For coming out with initial offer, it has been specified that the size of the assets under the REIT shall not be less than Rs. 1000 crore which is expected to ensure that initially only large assets and established players enter the market.

(iv) Further, minimum initial offer size of Rs. 250 crore and minimum public float of 25% is specified to ensure adequate public participation and float in the units.

(v) General procedure for initial/follow-on offer, filing of offer document/follow-on offer document, allotment and listing of units has been specified in the Regulations. Detailed disclosures required in the offer document/follow-on offer document have also been specified in the Regulations.

(vi) The REIT may raise funds from any investors, resident or foreign. However, initially, till the market develops, it is proposed that the units of the REITs may be offered only to HNIs/institutions and therefore, it is proposed that the minimum subscription size shall be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh.

D. RESPONSIBILITIES OF VARIOUS PARTIES TO THE REIT

Responsibilities of the Trustee

(i) The Trustee shall be independent of sponsor and manager and hold the REIT assets in the name of the REIT for the benefit of the investors in accordance with the Trust Deed and the proposed Regulations. The role of Trustee is primarily supervisory in nature.

Responsibilities of the manager

(i) The manager shall primarily assume all the operational responsibilities with respect to the activity of the REIT. Roles and responsibilities of the manager shall be specified in the agreement entered into between the trustee and the manager.

(ii) To ensure that the activities of the REIT are managed professionally, it has been specified that the manager needs to have atleast 5 years of related experience coupled with other requirements such as minimum networth, manpower with sufficient relevant experience, etc.

Responsibilities of sponsor and the valuers

(i) The sponsor’s responsibilities shall primarily pertain to setting up of the REIT including appointment of the Trustee. The sponsor shall also be obligated to maintain a certain percentage holding in the REIT to ensure a ‘skin-in-the-game’ at all times. Even in those cases where the sponsor sells its units it shall arrange for another person/entity to act as the re-designated sponsor.

(ii) Further, a minimum net worth and experience criteria have also been laid down for the sponsor in the proposed Regulations.

E. INVESTMENT CONDITIONS AND DIVIDEND POLICY

(i) In line with the nature of the REIT to invest primarily in completed revenue generating properties, it has been mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties. In order to provide flexibility, it has been allowed to invest the remaining 10% in other assets as specified in the proposed Regulations.

(ii) To ensure regular income to the investors, it has been mandated to distribute atleast 90% of the net distributable income after tax of the REIT to the investors.

(iii) REITs have been allowed to invest in the properties directly or through special purpose vehicles, wherein such special purpose vehicles (SPV) hold not less than 90% of their assets directly in such properties. However, in such cases, it has been mandated that REIT shall have control over the SPV so that the interest of the investors of the REIT are not jeopardised.

(iv) The REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities. Further, the REIT shall only invest in assets based in India.

F.  RELATED PARTY TRANSACTIONS

(i) All related party transactions shall be on an arms-length basis, in the best interest of the investors, consistent with the strategy & investment objectives of the REIT and shall be disclosed to the exchanges and investors periodically in accordance with the listing agreement and the proposed Regulations.

(ii) Stringent conditions have been imposed on related party transactions including detailed disclosures, valuation requirements, approval from majority of investors, related party abstaining from voting, restrictions on leasing of assets to related parties, requirement of fairness opinion for lease, etc.

(iii) For any related party transactions for acquisitions/sale of properties, valuation reports from 2 independent valuers shall be obtained and the transaction for purchase/sale of such properties shall be at a price not greater / less than average of the two independent valuations.

G. RIGHTS OF INVESTORS

(i) In order to ensure safeguarding of interests of the investors, several rights have been provided to the investors in order to empower them.

(ii) The investors shall have right to remove the manager, auditor, principal valuer, seek delisting of units, apply to SEBI for change in trustee, etc.

(iii) Further, an annual meeting of all investors is mandatory to be convened by the Trustee wherein matters such as latest annual accounts, valuation reports, performance of the REIT, approval of auditors & their fees, appointment of principal valuer, etc. shall be discussed.

(iv) Further, approval of investors has been made mandatory in special cases such as certain related party transactions, any transaction with value exceeding 15% of the REIT assets, borrowing exceeding 25%, change in manager/ sponsor, change in investment strategy, delisting of units, etc.

(v) In order to ensure that a related party does not influence the decision, it has been specified that any person who is a party to any transaction as well as associates of such person(s) shall not participate in voting on the specific issue.

[The draft regulation is open for public comments till 31st October. Anyone interested in giving suggestions/recommendations can do so within the stipulated time]