Introduction
India’s Infrastructure Investment Trust (InvIT) and Real Estate Investment Trust (REIT) market has witnessed significant growth in recent years, with assets under management increasing steadily and SEBI placing greater emphasis on governance standards. Related Party Transactions (RPTs) have consistently remained one of SEBI’s primary governance priorities across listed entities and regulated entities. While the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) prescribe a detailed governance architecture for such transactions, the regulatory framework applicable to InvITs and REITs adopts a significantly moderate approach. This raises an important practical question that, how should InvITs and REITs design an appropriate governance framework where the regulations themselves remain silent?
This article shall analyse, the RPT framework under SEBI (Infrastructure Investment Trust) Regulations, 2014 (InvIT Regulations) and SEBI (Real Estate Investment Trust) Regulations, 2014 (REIT Regulations) in the light of RPT provisions of other matured laws like Companies Act, 2013 (Act) and LODR Regulations.
RPT provisions under InvIT & REIT Regulations
The definition of Related Party (RP) under Reg 2(1)(zv[1]) of the InvIT Regulations and Reg 2(1)(zo[2]) of the REIT Regulations refers to the definitions of RP provided under the Act and Ind AS-24. Other than RPs covered under definitions under these 2 laws vis Ind AS-24 and the Act, the InvIT Regulations/ REIT Regulations also include parties to the InvIT/ REIT (sponsors, Investment Manager (IM), project manager (PM) and Trustee) and their directors, promoters and partners in the list of RPs.
Regulation 19 of the InvIT and REIT Regulations governs Related Party Transactions (RPTs), prescribing the approval requirements for specified transactions, including prior unitholder approval where applicable, and mandating disclosures to the stock exchanges and unitholders. It is further pertinent to note that the Master Circulars issued for InvITs and REITs prescribe the format and manner of disclosure of RPTs to be included in the Annual Report and the Half-Yearly Report.
However, point worth noting is that, there are certain crucial items with respect to RPT, about which the InvIT and REIT Regulations as well as the Master circulars are silent which are discussed further.
What the Regulatory Silence Means for InvITs & REITs in Practice?
- Since the InvIT and REIT Regulations derive concepts from multiple legislative sources rather than prescribing a self-contained framework, a comparative analysis becomes essential to understand both the safeguards incorporated and the gaps that continue to exist such as:
- Unlike the LODR Regulations, the InvIT and REIT Regulations prescribe only a broad framework for RPTs which is not comprehensive. They do not provide detailed guidance on the approval process by audit committee or Board, omnibus approvals, material modifications, minimum information requirements, or even an independent definition of a “Related Party Transaction“.
- Further, LODR Regulations also expressly requires the materiality threshold for RPTs to be assessed both transaction-wise with each related party and on an aggregate basis during a financial year, the InvIT and REIT Regulations remain silent on this aspect. This absence of regulatory guidance leaves the methodology for assessing materiality open to interpretation.
- Also, the exemptions available to listed entities under LODR Regulations in respect of certain RPTs are not expressly extended to InvITs and REITs under their respective regulatory framework.
Following is the tabular representation of comparative analysis.
| Parameter | InvIT / REIT Regulations | LODR Regulations | Companies Act, 2013 |
| Definition of RPTs | Not defined | Defined under Reg. 2(1)(zc) | RPT not exclusively defined. Section 188(1) provides list. |
| Related Party Definition | Refers to Companies Act + IndAS-24 + InvIT/ REIT parties | Reg. 2(1)(zb) — refers to Companies Act + IndAS-24 | Section 2(76) provides exhaustive list |
| Audit Committee Approval | Not prescribed | Mandatory under Reg. 23(2) | Mandatory under Sec. 177 |
| Board Approval | Not prescribed | Required for certain RPTs | Required under Sec. 188 |
| Omnibus Approval | Not prescribed | Permitted under Reg. 23(3) | Permitted under section 177(4) |
| Unit Holder / Shareholder Approval | Required under Reg. 19(3) for specific transactions | Required under Reg. 23(4) | Required under Sec. 188(1) |
| Materiality Threshold | Not defined | Defined under Reg. 23(1) | Defined under Rule 15 of Companies (Meetings) Rules |
| Disclosures | Required under Reg. 19 and master circular, however, not elaborative and periodicity not defined | Half yearly disclosure – Required under Reg. 23(9) | Annual disclosure in format AOC-2 to be attached to board report. |
| Material Modification | Not prescribed | Addressed under SEBI circulars | Not specifically addressed |
| Exemptions | Not given | Given under Regulation 23(5) | Given under section 188 |
- In addition to this comparative analysis, if we compare the RPT provisions under InvIT regulations with those under REIT regulations, it is observed that the provisions under REIT regulations are slightly more elaborate as it provide a list of such transactions with related parties which require compliance with RPT provisions and prescribe minimum data to be given in explanatory statement for obtaining unit holder approval.
Practical difficulties faced within the industry
- One such challenge pertains to the identification of related parties. While the InvIT and REIT Regulations refer to the definitions prescribed under the Companies Act, 2013 and Ind AS-24, the practical exercise of identifying related parties across the Parties to the InvITs/ REITs, HoldCos, SPVs and other entities forming part of the trust structure often becomes complex. Further, treating the parent bank of an otherwise professionally independent SEBI-registered Trustee as a related party imposes an additional compliance burden that may not be warranted. This is particularly so as a significant number of banking transactions undertaken with such banks are in the ordinary course of business and are routine in nature.
- Another key practical challenge under the InvIT and REIT Regulations is the absence of an exemption for transactions with wholly owned subsidiaries. Under the LODR Regulations, such exemptions were introduced on the premise that transactions within a wholly owned group structure pose a limited risk of conflict of interest and, therefore, need not be subjected to the same level of regulatory oversight. Consequently, even genuine operational transactions within the group may require additional approvals and disclosures, increasing compliance efforts and timelines without delivering a commensurate governance benefit.
- Absence of express definition of RPTs and the approval mechanisms viz. audit committee or board approval for RPTs means that the level of independent oversight over such transactions largely depends on the governance framework adopted by each InvIT or REIT.
- This complexity is further accentuated where different entities within the structure have evolved independently, each following its own governance culture, organisational structure, internal policies and compliance practices. Accordingly, a consistent and centralised approach towards identification and monitoring of RPTs assumes significant importance.
- To address these gaps, InvITs/ REITs rely on their internal RPT policies and frameworks, absence of which is also highlighted by SEBI during the Periodic Inspections. Thus, having a robust policy is important to mitigate governance concerns or issues.
RPT policy as defence
- In our experience advising InvITs and REITs on governance and compliance matters, an effective RPT policy should not merely reproduce the Regulations but establish a governance process covering identification, approvals, documentation, monitoring and periodic review. It requires each InvIT / REIT to independently determine the scope of its RPT obligations while taking care of the minimum norms prescribed in the Regulations.
- A review of the RPT policies adopted by InvITs / REITs indicates that most market participants have sought to bridge these gaps by drawing guidance from Regulation 23 of the LODR Regulations. However, there continues to be considerable variation in areas such as the definition of an RPT, approval thresholds, treatment of repetitive transactions, and material modifications.
- Until greater regulatory clarity is provided, adopting a well-defined RPT policy aligned, to the extent appropriate, with the principles of the LODR Regulations offers a practical and defensible approach.
Key Governance Questions Emerging Under the Current Framework to be addressed
- Should every transaction with a related party be treated as an RPT?
- Can omnibus approval concepts be borrowed from LODR?
- How should material modifications be identified?
- What level of independent oversight should be applied?
- How should I justify arms’ length basis for all the RPTs?
- Can any exemptions be given as per the framework for the RPTs with wholly owned subsidiaries?
- Should materiality be assessed transaction-wise or on an aggregated basis over a financial year?
RPT Governance Checklist for InvITs/ REITs
Based on a review of publicly available RPT policies and governance disclosures across listed InvITs and REITs, the following elements represent the current high-water mark of internal governance practice:
- Defined RPT scope — Policy explicitly defines what constitutes an RPT including whether it covers only transactions entered into by the InvIT/REIT with its related parties or also extends to transactions between two related parties of the InvIT/REIT where the InvIT/REIT itself is not a party.
- Periodic Related Party mapping — identification and updating of related parties across the InvIT/REIT structure.
- Audit Committee approval threshold — Transactions above a prescribed value (e.g., ₹1 crore or 1% of consolidated turnover, whichever is lower) require prior Audit Committee approval.
- Board review mechanism — Transactions approved by the Audit Committee are placed before the Board for review at the next meeting.
- Omnibus approval for repetitive transactions — Annual omnibus approval framework for routine, arm’s-length transactions with sponsors, IM, PM, SPVs etc.
- Materiality thresholds for unit holder approval — Clear monetary or percentage-based thresholds triggering unit holder approval, aligned with Regulation 19 of InvIT & REIT Regulations
- Material modification clause — Any revision to an approved RPT that changes value, counterparty, or commercial terms by more than a defined threshold (e.g., 10%) triggers fresh approval, as a recommendation.
- Independent valuation for significant transactions — Transactions above a higher threshold require independent valuation or fairness opinion before approval.
- Minimum disclosure requirements — Audit Committee, Board, Unitholders are given base information as required for the transactions proposed for approvals.
- Parameters or criteria for establishing arms’ length — such as benchmarking with market prices, obtaining independent quotations or valuations, comparison with similar third-party transactions, adherence to approved pricing methodologies, and maintenance of adequate supporting documentation.
Although these measures have contributed towards strengthening governance standards, the approaches adopted continue to differ across entities owing to the absence of a uniform regulatory framework.
Conclusion
The RPT framework for InvITs/ REITs is at an inflection point. SEBI has progressively tightened governance norms for listed entities, and InvITs/ REITs have not been exempt from that trend. While regulatory intervention may eventually address many of the existing gaps, governance cannot wait for legislative change. Until a more comprehensive framework is introduced, the responsibility of ensuring robust oversight rests with the internal governance architecture adopted by each InvIT and REIT. Institutions that proactively strengthen their RPT framework today are likely to be better positioned from both a regulatory and investor confidence perspective.
[1]InvIT Regulations – 2(1)(zv) “related parties” shall be defined under the Companies Act, 2013 or under the applicable accounting standards and shall also include –
(i) parties to the InvIT;
(ii) ***
(iii) promoters, directors and partners of the persons mentioned in clause (i)
[2]ReIT Regulations – 2(1)(zo) “related parties” shall be defined under the Companies Act, 2013 or under the applicable accounting standards and shall also include –
(i) parties to the REIT;
(ii) ***
(iii) promoters, directors and partners of the persons mentioned in clause (i)
This Article written by
CS Jyotika Bhojwani (Manager InvITs team) and CS Rutuja Umadikar (associate R&D team)
This article is published on Taxguru at the link below.