Contextual Overview The Securities and Exchange Board of India (Sebi) has recently proposed additional regulations regarding the issuance of subordinate units by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). These proposals are a continuation of Sebi’s efforts to refine the framework for subordinate unit issuance which began with a consultation paper released in December.
Key Proposals
- Issuance Limits and Rights of Subordinate Units: The proposed regulations specify that the amount of subordinate units issued at the time of asset acquisition shall not exceed 10% of the asset’s acquisition price. Furthermore, the total number of outstanding subordinate units at any given time should not exceed 10% of the total number of outstanding ordinary units. These subordinate units may carry inferior voting rights, distribution rights, or a combination of both. Sebi aims to ensure uniformity in the rights granted by subordinate units, proposing that all units issued by a REIT or InvIT should have similar inferior rights, thus avoiding multiple classes of subordinate units.
- Purpose of Subordinate Units: The issuance of subordinate units primarily serves to bridge valuation gaps perceived by sponsors (asset transferors) and REITs/InvITs (or their investors/unitholders).
- Regulatory Compliance and Employee Incentives: The proposals include provisions for the creation of an Employee Benefit Trust (EBT) for the management of REITs or InvITs. This trust can acquire REIT or InvIT units from the shareholders of the management or via subscription in lieu of management fees. There are stringent conditions applied to the sale or transfer of these units, ensuring they are used solely for employee benefit.
- Uniformity and Transparency in Unit Issuance: The proposal emphasizes the importance of maintaining uniformity and transparency in the issuance of subordinate units. Changes to terms and conditions of the subordinate units after issuance are discouraged to avoid disrupting the certainty of the sale transaction and impacting the agreed-upon conditions between the parties involved.
- Stakeholder Involvement: Sebi has opened up these proposals for public comment until January 31, indicating a collaborative approach towards finalizing the framework.
Analysis The new framework proposed by Sebi is seen as comprehensive, addressing critical aspects like eligibility, voting rights, approval processes, and disclosure requirements. This framework aims to provide a robust structure for market participants while balancing the interests of various stakeholders involved. The addition of a separate EBT for management and mechanisms for it to receive REIT or InvIT units is particularly aimed at balancing trust interest with employee incentives, focusing on transparency and accountability.
Implications These proposals, once finalized, will likely impact how REITs and InvITs operate, particularly in terms of how they manage subordinate units and align their operational strategies with the regulatory framework. Investors and other stakeholders in these trusts would need to understand these changes for informed decision-making.