Following the constitution of working groups in October 2023 to ease compliance for SEBI-regulated entities, SEBI has issued three consultation papers on ease of doing business for InvITs. Continuing these efforts, SEBI has now released a fourth consultation paper for public comments, based on recommendations from industry associations such as BIA and IRA.
The paper sets out the following proposals for public consultation:
1. Permitting investment in third-party projects by REITs and InvITs without controlling interest
2. Manner of computation of threshold for unitholder approvals for certain matters
3. Review of framework relating to exit offer in case of change in sponsor
4. Recognition of remote common infrastructure as real estate (for REITs)
5. Reduction of the cooling-off period for Offer for Sale by private listed InvITs (for InvITs)
In this newsletter, we examine the implications of these proposals.
1. Permitting investment in third-party projects by REITs and InvITs without controlling interest
Currently, under the REIT Regulations and InvIT Regulations, REITs and InvITs may invest up to 10% of their asset size in under-construction projects through holding companies and/or SPVs. Under the respective regulations, the REIT/InvIT is required to hold a controlling interest in such holding company or SPV.
It is now proposed that REITs/InvITs be permitted to invest in under-construction projects without acquiring a controlling interest in the relevant SPV. However, such investment would be subject to certain conditions, including the following:
- Such investments may be restricted to investee entities engaged in activities pertaining to or incidental to the underlying real estate/infrastructure and holding not less than 80%/90% of their assets in real estate/infrastructure projects for REITs/InvITs, respectively.
- The investment should be only in a third-party project, and the sponsor or sponsor group entity of the InvIT should not have any interest in such project.
- There should be a clear commitment and glide path to achieve the required stake in such entity in the future so that the investment may qualify as a HoldCo/SPV investment.
- There shall be a binding agreement between the shareholders of the investee entity and the REIT/InvIT to ensure that decisions taken by such shareholders are not in contravention of the glide path proposed by the REIT/InvIT.
- The binding agreement shall require the shareholders of the investee entity to ensure that the board of the investee entity passes a resolution approving the glide path proposed by the REIT/InvIT.
- Such investment shall be approved by the Board of the Investment Manager of the InvIT or the Manager of the REIT.
Most of these conditions are proposed to be prescribed by SEBI through a separate circular amending the Master Circulars for REITs and InvITs.
Implications
As per the consultation paper, investment in a minority stake in under-construction assets would provide structured capital to under-construction projects and enable REITs and InvITs to build a pipeline of stable, revenue-generating assets while minimising exposure to construction-related risks.
Further, investment in under-construction projects without a controlling interest may create a separate class of assets in the portfolio of REITs/InvITs.
2. Manner of computation of threshold for unitholder approvals
At present, certain proposals listed under Regulation 22(5A) of the InvIT Regulations and the corresponding provisions of the REIT Regulations require approval of 75% of the unitholders by value. However, due to limited investor participation, achieving this threshold may be difficult.
To address this issue, it is proposed that a proposal be considered approved if 75% of the total votes cast are in favour of the proposal. Accordingly, the existing requirement based on 75% of the value of unitholders is proposed to be replaced with approval by 75% of the total votes cast.
Implications
The consultation paper highlights that this change would align the provision with the framework under the Companies Act, 2013.
The industry had highlighted to SEBI that, due to low investor participation, it may be difficult to obtain approval from unitholders representing 75% in value. The proposed amendment seeks to address this issue by calculating the 75% threshold with reference to the total votes cast on the proposal rather than the total value of all unitholders.
3. Review of framework relating to exit offer in case of change in sponsor
SEBI has reviewed the existing framework for providing an exit offer to dissenting unitholders in case of a change in sponsor of a REIT/InvIT and has proposed the following changes:
| Topic | Existing provision | Proposed change |
| Definition of Dissenting Unitholders | As per the Master Circulars for REITs and InvITs, “Dissenting Unitholders” include unitholders holding units as on the cut-off date who have not voted in favour of the proposed resolution, irrespective of whether they were present or not. | Under the proposed amendment, only those unitholders who have exercised their right to vote and voted against the proposed resolution would be considered Dissenting Unitholders. Unitholders who abstain from voting would not be considered Dissenting Unitholders. |
| Person providing the Exit Offer | Where the obligation to provide an exit offer arises due to the exit of one sponsor from a REIT/InvIT having multiple sponsors, it is presently unclear who is required to provide such exit offer. | It is proposed to clarify that, in such a situation, the exit offer may be provided by: (i) the outgoing sponsor or its sponsor group entities; or (ii) any of the continuing sponsors or their sponsor group entities. |
| Acceptance of Units Tendered | Currently, the InvIT/REIT Master Circulars provide that, during an exit offer, only such number of tendered units shall be accepted on a proportionate basis as would ensure that the minimum public unit holding (MPU) is maintained after completion of the exit offer process. | It is proposed that all units tendered by Dissenting Unitholders under the exit offer shall be accepted. Where acceptance of such units results in a breach of the applicable MPU requirement, the REIT/InvIT would be required to restore the prescribed MPU within one year from the date of such breach. |
Implications
These proposed amendments are largely clarificatory in nature and are also intended to ease compliance for REITs/InvITs.
4. Recognition of Remote Common Infrastructure as Real Estate – REITs
Under the existing REIT Regulations, investment in common infrastructure is permitted irrespective of whether such infrastructure is co-located with the underlying real estate assets. However, the definition of “real estate” presently recognises only common infrastructure forming part of composite real estate projects. This creates an inconsistency in the treatment of common infrastructure located remotely from the underlying project.
SEBI proposes to address this inconsistency by recognising all common infrastructure, whether co-located or remote, as “real estate” for the purposes of the REIT framework.
Implications
The proposal is intended to provide greater clarity and consistency regarding the eligibility and treatment of common infrastructure as a permissible real estate asset for REITs.
5. Reduction of Cooling-off Period for Offer for Sale by Private Listed InvITs
SEBI proposes to reduce the cooling-off period applicable to an Offer for Sale (“OFS”) by private listed InvITs whose units are illiquid, with the proposed cooling-off period being reduced to ±8 weeks. The proposal has been made based on feedback received from market participants and with the objective of facilitating ease of doing business.
Implications
The existing OFS framework for REITs and InvITs is broadly aligned with the OFS framework applicable to equity shares of listed companies. SEBI proposes to retain this broad alignment while making certain modifications specifically for private listed InvITs.
Since retail investors do not participate in private listed InvITs, the provisions relating to retail investors under the OFS framework would not apply to such InvITs. Consequently, the OFS for private listed InvITs would remain open for one day, i.e., T day. Further, the trading lot for an OFS of listed InvIT units would remain the same as the trading lot applicable to such InvIT in the secondary market under the InvIT Regulations.
The proposed reduction in the cooling-off period is intended to provide greater flexibility to private listed InvITs, sponsors and other eligible unitholders in undertaking OFS transactions, particularly where the units are illiquid.