REITs to need insurance cover, can't promise guaranteed return

Sebi has decided to keep disclosure requirements and overall regulatory compliance mechanism simpler for REITs

To safeguard investors' interest, new norms for the launch of Real Estate Investment Trusts (REITs) in India will require such bodies to take adequate insurance cover for their realty assets and bar them from promising any guaranteed returns.

The detailed norms, to be made public soon, will also contain strict provisions for any misleading claims and will require them to a strict 10-point code of conduct for fair business practices.

Besides, any change in the sponsor group of these Trusts, which will be listed on stock exchanges and their units can be traded like any other security, would need approval from a vast majority of unit-holders. Failing that, they would need to be given an exit option from the new sponsor.

At the same time, regulator Sebi has decided to keep the disclosure requirements and overall regulatory compliance mechanism simpler for REITs, while registration fees would also be on lower side vis-a-vis other instruments to raise funds from the capital markets.

The new REIT regulations, which were cleared by Sebi's board on August 10, would be notified soon after necessary fine-tuning, a senior official said.

The new norms would allow formation of REITs to invest largely in completed and income-generating real estate assets and the subsequent listing of such trusts with an initial public offer (IPO) of at least Rs 250 crore. The value of total assets of such trusts would need to be Rs 500 crore, while at least 25% of total number of units would need to be offered to the public investors.

These Trusts would not be allowed to invest in vacant land or agriculture land, while any deviation from their stated investment objective would need clearance from their unit-holders, as per the norms finalised by Sebi.

The sponsor or its associates would also need at least five years of experience in development of real estate on fund management in real estate industry, while the new norms also prescribe eligibility conditions for manager of the Trust.

The manager would need to arrange or ensure that the real estate assets of the REIT, or through an Special Purpose Vehicle, have "adequate insurance coverage".

The sponsors would also need to ensure that they hold at least 25% of total units for at least three years after the listing, while they would have to maintain at least 15% holding at all times.

The 10-point Code of Conduct for REITs, as prescribed by Sebi, include conduct of all affairs in the interest of unit-holders, "adequate, accurate, explicit and timely disclosure of relevant material information", avoidance of any conflict of interest as far as possible or ensure appropriate disclosure and fairness in charging any fees.

Other points include carrying out of business and investments as per the stated and disclosed objectives, high standards of integrity and fairness in all dealings and exercise of due diligence, proper care and independent independent professional judgements at all times.