Introduction
Securities & Exchange Board of India (SEBI) has proposed a framework for issuance of Depository Receipts (“DRs”) against units of Real estate Investment Trusts (REITs) and publicly listed Infrastructure Investment Trusts (InvITs). The proposal is placed for public comments by SEBI in the form of a consultation paper.
If implemented, REITs and InvITs may be able to use their listed units as underlying securities for DRs that can be listed and traded in permitted foreign jurisdictions, including IFSC. This could help them widen their investor base, explore an additional avenue for fund raising beyond the domestic market, and bring an additional layer of regulatory and compliance requirements.
In this write up, we shall try to have an overview of the proposed framework and shall also try to understand some points of caution which need attention of compliance officer of ReIT/InvIT.
Purpose of proposal.
The consultation paper states that, as per the Depository Receipt scheme 2014 and FEMA Non-Debt Instruments rules 2019 (NDI rules) the ReITs/InvITs are already eligible to issue DRs against their units as underlying security. However, neither there is enabling provision under ReIT/InvIT regulations, nor any framework for issuing of DRs by ReITs/InvITs. Hence, in order to facilitate issuance of DRs by ReIT/InvIT, an enabling provision and framework is proposed to be introduced.
If introduced, this framework would provide ReITs/InvITs with access to international markets. It would also facilitate potential foreign-currency capital raising, diversification of investor base, and creation of an international market for exposure to Indian REIT/InvIT assets.
Foundation of structure.
As mentioned above, the consultation paper not just proposes to add an enabling provision in the regulations but also proposes a detailed framework for issuing of DRs and functioning thereof. The said framework for ReIT/InvIT is based on the DR scheme 2014 and the circular dated 10th October 2019 which governs the issue and functioning of DRs issued by companies.
Key proposals.
The public comments are sought on two questions that, whether ReIT/InvIT should be allowed to issue DRs? And whether the framework proposed for such issue is appropriate?
However, following are some important highlights of the proposal.
| Proposal | What it means |
| Insertion of provision | An enabling provision allowing issue of DRs shall be inserted in ReIT/InvIT regulations. |
| Eligibility for ReIT/InvIT issuing DRs and for unitholders offering their units for issue of DRs. | a) the REIT/InvIT is in compliance with ReIT/InvIT regulations; b) the REIT/InvIT, parties to the REIT/InvIT and their directors, promoters and partners, and unitholders transferring units are not debarred from accessing the capital market by the Board; c) none of the parties to the REIT/InvIT and their directors, promoters, and partners is a promoter or director of any other Company or REIT/InvIT which is debarred from accessing the capital market by the Board; d) the REIT/InvIT, parties to the REIT/InvIT and their directors, promoters and partners, and unitholders transferring units are not wilful defaulter. e) the parties to the REIT/InvIT and their directors, promoters and partners, and unitholders transferring units are not fugitive economic offender. |
| Eligible securities | Units of REITs and publicly listed InvITs can potentially become underlying securities on which DRs will be issued. |
| DR issuance | DRs may be issued against such underlying units |
| Depository arrangement | Custodian will hold the underlying units, and foreign depository will issue DRs against such units to foreign DR holders. |
| Voting rights | Rights of DR holders would be exercised through the depositary mechanism as per instructions received from DR holders. |
| Compliance post listing on international exchanges | Post listing of DRs on international stock exchanges of permissible jurisdictions the ReIT/InvIT will have to adhere to listing norms of that stock exchanges in addition to Indian stock exchanges. |
Caution points.
Despite a detailed framework for functioning of DRs, there are some points which need attention before issuing DRs.
Following is the small illustrative list of such points:
- ReIT/InvIT will have to undertake additional compliance with respect to disclosure of information etc. pursuant to listing on international exchanges
- As per current framework, amount of distribution has to be credited in unitholder’s account within 5 working days from record date. Compliance with this provision may prove difficult considering the foreign DR holders and matters relating to currency conversion, tax deduction etc.
- The present formats for reporting investor grievance, unitholding pattern etc. will have to be modified in order to incorporate DR holders therein.
Conclusion.
The proposed framework opens an additional avenue for REITs and InvITs to access international investors and raise funds beyond the domestic market. At the same time, issuing DRs would bring additional regulatory and operational requirements, particularly in relation to disclosures, distributions, investor reporting and compliance with the requirements of international stock exchanges.