Sebi issues norms for real estate and infrastructure investment trusts

Market regulator Securities and Exchange Board of India (Sebi) on Sunday issued guidelines under which Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) will be allowed to operate in India.

REITs, to be set up as a trust and registered with Sebi, would have parties such as trustee, sponsor(s) and manager and the trustee has to be a Sebi-registered debenture trustee who is not an associate of the sponsor or manager.

Once registered, the REIT should raise funds through an initial offer. Subsequent raising of funds may be through follow-on offer, rights issue, qualified institutional placement, etc.

The minimum subscription size for units of REIT would be Rs2 lakh. The units offered to the public in initial offer should not be less than 25 per cent of the number of units of the REIT on post-issue basis.

An REIT, which is on the lines of mutual fund offering units to investors, will help those who wish to invest in property for the lucrative gains it offers, but do not have sufficient capital to acquire physical real estate assets such as land or buildings now have a market option.

Investors in an REIT stand to earn both dividends (from rental income of the property), as well as capital appreciation.

For coming out with an initial offer, the value of the assets owned/proposed to be owned by REIT should be of value not less than Rs500 crore

Any REITs or InvITs entering the market will have to be listed. The minimum initial offer size should be Rs250 crore. They can also borrow additional funds to acquire assets, but the borrowings cannot exceed 49 per cent of the value of the trust's assets.

Sebi has put minimum investment in REIT at Rs2 lakh. The units of REIT can be traded on stock exchanges once listed. The trading lot for such units will be Rs1 lakh.

These units should be mandatorily listed on a recognised stock exchange and REIT should make continuous disclosures in terms of the listing agreement.

The trustee should generally have an overseeing role in the activity of the REIT. The manager should assume operational responsibilities pertaining to the REIT.

REIT may invest in commercial real estate assets, either directly or through SPVs but should hold or proposes to hold controlling interest and not less than 50 per cent of the equity share capital or interest in such SPVs.

Further, such SPVs should hold not less than 80 per cent of its assets directly in properties and shall not invest in other SPVs.

Once registered, the REIT should raise funds through an initial offer. Subsequent raising of funds may be through follow-on offer, rights issue, qualified institutional placement, etc. The minimum subscription size for units of REIT would be Rs2 lakh. The units offered to the public in initial offer should not be less than 25 per cent of the number of units of the REIT on post-issue basis.

REITS have to mandatorily invest at least 80 per cent of the value of its assets in completed and revenue generating properties. Not more than 20 per cent of the value of REIT assets shall be invested in following:

  • Developmental properties,
  • Mortgage backed securities,
  • Listed/unlisted debt of companies/body corporates in real estate sector,
  • Equity shares of companies listed on a recognised stock exchange in India which derive not less than 75 per cent of their operating income from real estate activity,
  • Government securities,
  • Money market instruments or cash equivalents.

However investments in developmental properties shall be restricted to 10 per cent of the value of the REIT assets
 
A REIT should invest in at least 2 projects with not more than 60 per cent of value of assets invested in one project. 

REITs should distribute not less than 90 per cent of the net distributable cash flows, subject to applicable laws, to its investors, at least on a half yearly basis.

They should, through a valuer, undertake full valuation on a yearly basis and updation of the same on a half-yearly basis and declare NAV within 15 days from the date of such valuation/updation.

The borrowings and deferred payments of the REIT at a consolidated level shall not exceed 49 per cent of the value of the REIT assets. In case such borrowings/ deferred payments exceed 25 per cent, approval from unit holders and credit rating shall be required.

Infrastructure Investment Trusts (InvITs) are similar to REITs, but focus on investments in infrastructure. InvITs may invest in infrastructure projects, either directly or through SPV.

In case of PPP projects, such investments should only be through SPV. An InvIT should hold or propose to hold controlling interest and more than 50 per cent of the equity share capital or interest in the underlying SPV, except where the same is not possible because of a regulatory requirement/requirement emanating from the concession agreement.

In such cases, the sponsor should enter into an agreement with the InvIT, to ensure that no decision taken by the sponsor, including voting decisions with respect to the SPV, are against the interest of the InvIT/ its unit holders.

Sponsor(s) of an InvIT should, collectively, hold not less than 25 per cent of the total units of the InvIT on post-issue basis for a period of at least 3 years, except for the cases where a regulatory requirement/concession agreement requires the sponsor to hold a certain minimum per cent in the underlying SPV. In such cases the consolidated value of such sponsor holding in the underlying SPV and in the InvIT should not be less than the value of 25 per cent of the value of units of InvIT on post-issue basis.

The proposed holding of an InvIT in the underlying assets should be not less than Rs500 crore and the offer size of the InvIT should not be less then Rs250 crore at the time of initial offer of units.

The aggregate consolidated borrowing of the InvIT and the underlying SPVs should never exceed 49 per cent of the value of InvIT assets. Further, for any borrowing exceeding 25 per cent of the value of InvIT assets, credit rating and unit holders' approval is required.

An InvIT, which proposes to invest at least 80 per cent of the value of the assets in the completed and revenue generating Infrastructure assets, should:

  • Raise funds only through public issue of units;
  • Have a minimum 25 per cent public float and at least 20 investors;
  • Have minimum subscription size and trading lot of Rs10 lakh and Rs5 lakh, respectively;
  • Distribute not less than 90 per cent of the net distributable cash flows, subject to applicable laws, to the investors, at least on a half yearly basis;
  • Undertake a full valuation, through a valuer, on a yearly basis and updation of the same on a half-yearly basis and declare NAV within 15 days from the date of such valuation/updation.

A publicly offered InvIT may invest the remaining 20 per cent in under construction infrastructure projects and other permissible investments, as defined in the regulations. However, the investments in under construction infrastructure projects should not be more than 10 per cent of the value of the assets.

An InvIT, which proposes to invest more than 10 per cent of the value of their assets in under construction infrastructure projects should:

  • Raise funds only through private placement from Qualified Institutional Buyers and body corporate;
  • Have minimum investment and trading lot of Rs1 crore;
  • Have minimum of 5 investors with each holding not more than 25 per cent of the units;
  • Distribute not less than 90 per cent of the net distributable cash flows, subject to applicable laws, to the investors, at least on a yearly basis;
  • Udertake full valuation on yearly basis and declare NAV within 15 days from the date of such valuation.

InvITs investing in under construction projects that are under public-private partnership, the project(s) should have achieved completion of at least 50 per cent of the construction of the infrastructure project as certified by an independent engineer or has expended not less than 50 per cent of the total capital cost set forth in the financial package of the relevant project agreement.

For Non-PPP project(s), the infrastructure project should have received all the requisite approvals and certifications for commencing construction of the project.

Listing is mandatory for both publicly offered and privately placed InvITs and InvIT should make continuous disclosures in terms of the listing agreement.

However, for any issue requiring unit holders' approval, the voting by any person who is a related party in such transaction as well as its associates should not be considered.