SEBI revives real estate trust proposal; issues draft regulations

The Securities and Exchange Board of India (SEBI) on Thursday issued draft guidelines for setting up real estate investment trusts (REITs) in India, reviving an effort that it had put on hold in 2008 during the global financial crisis.

REITs are listed entities that mainly invest in income-producing real estate assets, from which most of the income is distributed to its shareholders.

Under the proposed Real Estate Investment Trusts Regulations, 2013, real estate investment trusts will be set up as 'Trusts', managed by SEBI-registered trustees, sponsors, managers and principal valuers.

REITs will not launch any schemes.

The trusts would initially have to apply for registration with SEBI as a REIT in the specified format, if they meet the eligibility criteria as specified in the draft regulations.

On being satisfied that the eligibility conditions are satisfied, SEBI will grant the REIT certificate of registration.

After registration, the REIT can raise funds initially through an initial offer and once listed, can subsequently raise funds through follow-on offers.

Listing of units would be mandatory for all REITs. The units of the REIT should continue to be listed on the exchange unless delisted under the regulations. Provisions for delisting have also been specified in the regulations.

In order to ensure that initially only large assets and established players enter the market with an initial public offer, SEBI has specified that to be eligible for an initial offer, the REIT should have minimum assets of at least Rs1,000 crore.

Further, SEBI has specified the minimum initial offer size at Rs250 crore and minimum public float of 25 per cent to ensure adequate public participation and float in the units.

Role of trustees and managers
The trustee should be independent of the 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.

The trustee will have to ensure that the activity of the REIT is in accordance with the regulations. The regulations also impose certain specific obligations on the trustees for achieving the same.

The right and obligation to convene meetings of the investors should lie with the trustee and he / she should follow procedures for holding such meetings as specified in the proposed regulations.

The managers should primarily assume all the operational responsibilities for the activity of the REIT.

These roles and responsibilities should be specified in the agreement entered into between the trustee and the manager.

To ensure that the activities of the REIT are managed professionally, it has been specified that managers would need to have at least 5 years of related experience coupled with other requirements such as minimum net worth, manpower with sufficient relevant experience, etc.

Responsibilities of managers would be throughout the life of the REIT, right from the application for registration, issue and listing of units of REIT, day to day operation and management of the assets of REIT till the delisting of units, if any.

Managers will be responsible for various operational aspects, including appointment of various parties to the REIT, procedural aspects of issue and listing of the REIT units, investment decisions, disclosures and reporting, distribution of dividends etc.

Role of sponsor and valuers
The sponsor's responsibilities should primarily pertain to setting up of the REIT, including appointment of the trustee. The sponsor should also be obliged to maintain a certain percentage holding in the REIT to ensure a 'skin-in-the-game' at all times.

For ensuring fair and transparent valuation of the assets, the valuers have been obligated to follow valuation principles, have robust internal controls, have manpower with sufficient relevant experience, etc.

Investment rules and dividend policy
In line with the nature of the REIT to invest primarily in completed revenue generating properties, it has been mandated that at least 90 per cent of the value of the REIT assets should be in completed revenue generating properties.

In order to provide flexibility, it has been allowed to invest the remaining 10 per cent in other assets as specified in the proposed regulations.

To ensure regular income to the investors, it has been mandated to distribute at least 90 per cent of the net distributable income after tax of the REIT to the investors.

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 per cent of their assets directly in such properties.

However, in such cases, it has been mandated that REIT should have control over the SPV so that the interest of the investors of the REIT are not jeopardised.

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

Investment upto100 per cent of the corpus of the REIT has been permitted in one project subject to the condition that minimum size of such asset is not less than Rs1,000 crore.

Other detailed investment conditions are provided in the proposed regulations.

Related party transactions
All related-party transactions should be on an arms-length basis, in the best interest of the investors, consistent with the strategy and investment objectives of the REIT and should be disclosed to the exchanges and investors periodically in accordance with the listing agreement and the proposed regulations.

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.

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

Investors' approval is required for all related party transactions wherein the value is above a threshold as provided in the proposed regulations.

To avoid excessive leverage, the aggregate consolidated borrowings and deferred payments of the REIT have been capped at 50 per cent of the value of the REIT assets. If the borrowings exceed 25 per cent, the REIT would have to get a credit rating from a credit rating agency along with the approval of the majority of investors.

To ensure that the underlying assets of REIT are valued accurately, requirement of a full valuation, including a physical inspection of the properties, has been specified at least once a year. Further, a six-monthly updation in the valuation capturing key changes in the last six months has also been specified.

Consequently, the NAV should be declared at least twice in a year. Provisions have also been made for valuation in case of any material development.

Detailed disclosures have been specified for the annual and half-yearly valuation reports.

Further, for any purchase of a new property or sale of an existing property, it has been prescribed that a full valuation be undertaken and the value of the transaction should be not less than 90 per cent and not more than 110 per cent of the assessed value of the property for sale/purchase of assets respectively.

Rights of investors
In order to ensure safeguarding of interests of the investors, several rights have been provided to empower the investors.

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

Further, it is mandatory for the trustee to convene an annual meeting of all investors wherein matters such as latest annual accounts, valuation reports, performance of the REIT, approval of auditors and their fees, appointment of principal valuer, etc. should be discussed.

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

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.