Sebi proposes investment by REITs, InvITs in third party projects

Sebi has proposed allowing REITs and InvITs to take minority stakes in under-construction assets and easing norms to improve business flexibility

Markets regulator Sebi on Thursday proposed allowing Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to pick minority stakes in under-construction assets, which would help them to secure long-term asset pipeline.

In its consultation paper, Sebi proposed that REITs and InvITs be permitted to invest in under-construction projects without having a controlling interest, within the existing limits prescribed for exposure to such assets.

"Investing a minority stake in under-construction assets would enable REITs and InvITs to build a pipeline of stable, revenue-generating assets while minimising exposure to construction-related risks,"Sebi said.

Additionally, Sebi proposed several measures to facilitate ease of doing business for REITs and InvITs, including reducing the cooling-off period for offer for sale (OFS) by privately listed InvITs, recognising remote common infrastructure as real estate for REITs, and clarifying the computation of the threshold for unit-holder approvals for certain matters.

 

Among the proposals, Sebi has suggested the cooling-off period for illiquid privately placed InvITs be reduced from 12 weeks to 8 weeks.

At present, the cooling-off period for transactions -- purchases or sales before and after an OFS -- is based on liquidity. It stands at two weeks for the most liquid shares, four weeks for liquid shares and 12 weeks for illiquid shares.

Sebi noted that privately listed InvITs face inherent liquidity constraints due to their high trading lot size of Rs 25 lakh, which limits participation largely to institutional investors, body corporates and high-net-worth individuals.

Consequently, trading volumes in such InvITs tend to remain thin and they may fall under the illiquid category because of these structural liquidity constraints.

"Considering the submissions of industry association and in order to facilitate ease of doing business, the cooling-off period for illiquid privately placed InvITs may be reduced from 12 weeks to 8 weeks," Sebi said.

Also, the regulator has suggested recognising remote common infrastructure, such as captive renewable energy facilities, as "real estate" under REIT regulations.

Currently, REIT regulations allow investment in common infrastructure irrespective of whether such facilities are co-located with a REIT project. However, the definition of real estate refers to common infrastructure for composite real estate projects, creating a regulatory inconsistency for infrastructure located away from the main property.

Industry representatives have highlighted that this creates difficulties for remote captive renewable energy plants, which may be geographically distant but functionally integrated with commercial real estate.

To address the issue and support green energy and sustainability initiatives, Sebi has proposed amending the definition of real estate to cover remote common infrastructure.

Consequently, the regulator has also proposed removing a separate provision allowing REITs to invest in equity shares of companies exclusively holding common infrastructure, as such a provision would become redundant once common infrastructure itself is classified as real estate.

Separately, Sebi has proposed changes to the exit-offer framework in cases involving a change in sponsor of REITs and InvITs. It has suggested amending the definition of "dissenting unitholders" to cover only those unitholders who have voted against a proposed resolution.

The regulator has also proposed clarifying who will provide the exit option when one sponsor exits a REIT or InvIT having multiple sponsors.

Further, if public unitholding falls below the prescribed minimum threshold because of an exit offer given to dissenting unitholders, the REIT or InvIT would be required to restore minimum public unitholding within one year from the date of the breach.Sebi has also proposed specifying timelines for various activities related to such exit offers.

Also, Sebi proposed amending the threshold for unitholder approval for certain matters, requiring that votes cast in favour of the resolution should be at least 75 per cent of the total votes cast for that resolution.

"Thus, the basis for the threshold for unitholder approval for these matters may be changed to the 'total votes cast for the resolution' instead of the 'value'," Sebi proposed.

The Securities and Exchange Board of India (Sebi) has sought public comments on the proposals until August 27.