Sebi offers rights to unitholders of REITs, InvITs for corporate governance

With an aim to strengthen governance norms, markets regulator Sebi on Tuesday proposed special rights to unitholders of REITs and InvITs by providing the right to nominate representative on the boards.

Also, the regulator has suggested the concept of self-sponsored real estate investment trust (REIT) or infrastructure investment trust ( InvIT), according to a consultation paper.

In addition, Sebi has proposed that principles of stewardship code should be applicable to members, nominated by the unitholders, on the board of directors of investment manager of REIT and InvIT.

The proposed move would empower unitholders of REITs and InvITs to monitor their investment in REIT/InvIT and assist in decision making.

The Securities and Exchange Board of India (Sebi) has sought public comments on the proposals till May 29.

REITs and InvITs were introduced in India to provide investors with an opportunity to gain exposure to real estate and infrastructure projects respectively, with diversification of risks through pooling arrangement.

Generally, REITs invest majorly in completed and rent generating real estate assets. Privately placed InvITs can invest in under-construction assets as well as completed and revenue generating assets and public InvITs can invest majorly in completed and revenue generating assets.

In its consultation paper, Sebi noted that special or differential rights in form of board nomination rights are proposed to be granted to certain investors through offer document.

It has been submitted that investors require such rights due to large ticket size of the investment and the need to exercise certain control over the operations of the REIT/InvIT.

Accordingly, the regulator has suggested for special rights such as the right to nominate directors on the board of manager/investment manager of REIT or InvIT.

However, currently REIT and InvIT rules do not explicitly provide for granting of such special or additional rights.

It has been proposed that any unitholder holding minimum 10 per cent of units for every ten per cent held may be entitled to nominate one director on the board of manager/investment manager.

To avoid the creation of a very large board on account of nomination of director by unitholders on investment manager board, Sebi has proposed an alternate option for participation of unitholders in the decision making process by constituting a distinct unitholders council with members nominated by the unitholders holding minimum ten per cent of units.

The regulator has proposed for the introduction of a framework for self-sponsored REIT/InvIT. This will create a space for mature and independent professionally managed managers to emerge and provide a further exit option for the sponsor.

This would be in addition to the exit option through change of sponsor presently envisaged in the REIT and InvIT rules.