Sebi notifies norms for REITs, infrastructure investment trusts

Mumbai: The Securities and Exchange Board of India (Sebi) on Friday firmed up regulations that will govern real estate investment trusts, or REITs, and so-called infrastructure investment trusts (InvITs) that the market regulator decided to allow last month.

Following a board meeting in August, Sebi approved a long-pending proposal to allow Indian firms to launch REITs-a move that will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and eventually ordinary investors.

All REIT schemes, to begin with, will be close-ended real estate investment schemes that will invest in property with the aim of providing returns to unit holders.

The returns will be derived mainly from rental income or capital gains from real estate. REITs, Sebi said, will be allowed to invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs).

In SPVs, a REIT must have a controlling interest of at least 50% of the share capital and will have to hold at least 80% of their assets directly in properties. REITs will be allowed to raise funds only through an initial offering and units of REITs have to be mandatorily listed on a stock exchange, similar to initial public offering (IPO) and listing for equity shares.

A REIT will be required to have assets worth at least Rs.500 crore at the time of an initial offer and the minimum issue size has to be Rs.250 crore. The minimum subscription size for units of a REIT on offer will be Rs.2 lakh and at least 25% of the units have to be offered to the public.

Subsequently, REITs can raise money through follow-on offers, rights issues or qualified institutional placements and the trading lot for such units will be Rs.1 lakh, Sebi said in a statement.

According to an estimate by property broker Cushman and Wakefield, the assets that may qualify to be included in REITs may reach $20 billion by 2020. In the first three to five years, as much as $12 billion could be raised.

According to the norms, although a REIT may raise funds from any type of investors, resident or foreign, initially only wealthy individuals and institutions will be allowed to subscribe to REIT unit offers.

The market regulator said a REIT may have up to three sponsors, with each holding at least 5% and collectively holding at least 25% for a period of at least three years from the date of listing. Subsequently, the sponsors' combined holding has to be at least 15% throughout the life of the REIT.

Similar to the practice in the US, Australia, Singapore and other nations where REITs are common, Sebi has decided to allow these trusts to invest primarily in completed revenue-generating properties. To ensure that REITs generate continuous returns, Sebi said at least 80% of the REIT's assets has to be invested in completed and revenue generating properties.

And only up to 20% of assets can be invested in properties that are being developed, mortgage-backed securities, debt of companies in the real estate sector, equity shares of listed companies that derive at least 75% of their income from real estate, government securities, or money market instruments. No REIT can invest more than 10% in properties that are under construction.

Several firms have already begun drawing up plans for launching REITs. Embassy Property Developers, which is planning a $2 billion REIT with global private equity firm Blackstone Group, is planning to list it in India sometime next year.

Sebi said every REIT has to invest at least in two projects, with a maximum of 60% of assets going towards one project. All REITs have to distribute at least 90% of their net distributable cash flows to the investors.

To ensure transparency, Sebi said every REIT has to undergo an yearly valuation and declare its net asset values (NAV) within 15 days of the exercise.

The Sebi board also approved the launch of InvITs, which are somewhat similar to REITs. However, an initial offer will not be mandatory for InvITs though listing will be mandatory for both publicly and privately placed InvITs.

The regulator said such trusts can invest in infrastructure projects, either directly or through an SPV. In case of public-private-partnership (PPP) projects, such investments will be only through an SPV.

While listing, the collective holding of sponsors of an InvIT has to be at least 25% for at least three years. An InvIT will be required to have a holding worth at least Rs.500 crore in the underlying assets, and the initial offer size of the InvIT has to be at least Rs.250 crore. According to a Mint report on 10 August, executives from GMR Group and Anil Ambani-led Reliance Group, on condition of anonymity, said they will now explore the opportunities of using InvITs.

Sebi said that any InvIT, which looks to invest at least 80% of its assets in completed and revenue generating infrastructure assets, has to raise funds only through a public issue of units, with a minimum 25% public float and at least 20 investors.

Also, the minimum subscription size and trading lot of such a listed InvIT has to be Rs.10 lakh and Rs.5 lakh, respectively. A publicly offered InvIT may invest the remaining 20% in under-construction infrastructure projects and other permissible investments, Sebi said.

An InvIT that proposes to invest more than 10% of its assets in under-construction infrastructure projects can raise funds only through private placement from qualified institutional buyers with a minimum investment and trading lot of Rs.1 crore and from at least five investors, where single holding cannot be more than 25%.

Sebi's regulations secured board approval nearly six years after it first proposed to introduce such trusts and govern them. The board broadly approved the proposals that were put out in a consultation paper on REITs in October 2013. The launch of REITs was delayed partly because of a perception that the taxation structure was unfavourable for investors.

In the Union budget announced by the Bharatiya Janata Party-led government on 10 July, finance minister Arun Jaitley said the government was planning friendlier tax norms for REITs and infrastructure investment trusts.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.