[Analysis] REITs and InvITs – SEBI’s Proposed Regulatory Revision

Rachit Sharma [CS & LL.B] | Taxmann’s Advisory & Research [Corporate Laws]
Isha Bathla [CS & MBA] | Taxmann’s Advisory & Research [Corporate Laws]

Table of Contents

1. Introduction
2. Proposals for both REITs and InvITs
3. Proposals for InvITs Only

1. Introduction

In the budget announcements for FY 2023-24, the Hon’ble Finance Minister, among other things, announced that a consultative approach should simplify, ease, and reduce the cost of compliance for participants in the financial sector.

To align with the budget goals, the SEBI constituted various Working Groups to recommend simplifying and easing compliances under various SEBI Regulations. Accordingly, a working group for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) recommended specific measures to promote the ease of doing business (EoDB).

In due course, the SEBI, on May 9, 2024, released a Consultation Paper to reduce the compliance burden and improve the ease of doing business for REITs and InvITs. The consultation paper is divided into two parts. Para 2 addresses proposals for REITs and InvITs, while Para 3 focuses on InvITs.

2. Proposals for both REITs and InvITs

2.1 Timelines for Fund Distribution to Unitholders be Reduced to 5 Working Days

2.1.1 Existing Norms

The existing REIT and InvIT regulations mandate that funds be distributed to unitholders no later than 15 days from the date of their declaration¹.

2.1.2 Recommendations by Working Group

The working group for REITs and InvITs recommended revising the distribution timeline. The IRA submitted that compliance with the 15-day timeline for distribution from declaration poses challenges, such as the record date coinciding with a holiday, the last day of distribution falling on a bank holiday, the holiday falling between the declaration date and record date, and dependency on the income tax portal for the purpose of tax computation on distribution.

2.1.3 Proposed Norms

The working group observed that most REITs and InvITs distribute funds to unitholders quarterly, which is not the case with listed companies. Accordingly, it has been proposed to reduce timelines for undertaking distributions by REITs /InvITs to 5 working days from the declaration date.

2.2 Scheduling of Unitholders’ Meetings at a Shorter Notice

2.2.1 Existing Norms

The existing REIT and InvIT Regulations provide that unitholders must be notified of any matter requiring their approval within 21 days².

Currently, the REIT Regulations [other than Small and Medium REITs (SM REITs)] and InvIT Regulations do not provide any flexibility to convene a meeting of unitholders at shorter notice—i.e., a period of at least 21 days is mandatory in all scenarios.

2.2.2 Recommendations by Working Group

The working group observed that several matters require prior approval from unitholders under the REIT/InvIT Regulations. Additionally, there may be scenarios where the board of the manager/ investment manager of the REIT/InvIT is of the view that unitholder approval is necessary before processing a particular course of action. There may be difficulties where any delay in obtaining unitholder approval may adversely impact the REIT/InvIT and its unitholders’ interests. Accordingly, the working group recommended that unitholders meet at short notice.

2.2.3 Proposed Norms

The working group observed that the Companies Act 2013 specifically permits companies to convene shareholder meetings with shorter notice.

In view of aligning the provisions of the Companies Act and provisions applicable to SM REITs, it has been proposed to add a provision allowing REITs other than SM REITs and InvITs to call a unitholders’ meeting with less than 21 days’ notice subject to a certain condition. The condition is that consent from not less than 95% of unitholders entitled to vote has been received.

2.3 Quarterly Review of Statements of Investor Complaints

2.3.1 Existing Norms

As per the SEBI Master Circular for REITs and InvITs, the statement of investor complaints must be submitted to the stock exchanges within 21 days from the end of each quarter³. Further, a prior review of this statement by the Trustee and the Board of Directors/Governing Body of the Manager/Investment Manager is mandatory before submission of the statement to the stock exchanges.

However, the above provision does not align with SEBI (LODR) Regulations, 2015. Under the SEBI (LODR) norms, a listed entity must file quarterly Investor Complaints Reports with the recognised stock exchange. A prior review by BODs of the listed entity is not required.

2.3.2 Recommendations by Working Group

The working group on Ease of Doing Business (EoDB) recommended that the statement of investor complaints be submitted to the stock exchange(s) on the date of publication of the quarterly results.

Further, to align with LODR Regulations, the committee recommended that instead of a prior review of the statement of investor complaints by the manager/investment manager’s BODs, such a statement be placed before them quarterly.

2.3.3 Proposed Norms

In order to align the provisions in REIT Regulations, including SM REITs and InvIT Regulations, with the LODR Regulations, it has been proposed that a prior review of the statement of investor complaints by the Trustee and BODs of the manager/investment manager may not be required. Instead, such a statement must be placed quarterly before the BODs of the manager/investment manager for review.

2.4 Disclosure of Statement of Deviations Alongside Financial Results

2.4.1 Existing Norms

As per the SEBI Master Circular for REITs and InvITs, statements of deviations or variations must be submitted to the stock exchanges within 21 days from the end of each quarter⁴. However, this provision does not align with SEBI (LODR) norms, which require a listed entity to submit a statement of deviation or variation to the stock exchange on a quarterly basis along with the submission of financial results.

2.4.2 Recommendations by Working Group

As per SEBI (LODR) Regulations, 2015, listed entities are required to submit to the stock exchange a statement of deviation or variation on a quarterly basis along with the declaration of financial results.

The working group on EoDB recommended that the statement of deviation or variation be submitted to the stock exchanges on the date of publication of the quarterly results. The Hybrid Securities Advisory Committee (HySAC) supported this recommendation and agreed on revised timelines for filing these statements.

2.4.3 Proposed Norms

To align the provision in the REIT Regulations, including SM REITs and InvIT Regulations, with the SEBI (LODR) Regulations, it has been proposed to revise the timeline for submitting the statement of deviations and variations to coincide with the date of publication of the quarterly results, in line with the LODR Regulations.

2.5 Simplified Unitholders’ Voting Threshold

2.5.1 Existing Norms

The current REIT and InvIT regulations require approval from unitholders in certain specified matters. The threshold for approval of any resolution is that votes cast in favour shall be more than votes cast against, or votes cast in favour must constitute at least one and a half times the votes against the resolution⁵.

2.5.2 Recommendations by Working Group

A working group on EoDB recommended that the requisite voting thresholds be provided in percentage terms. Further, the working group recommended that explicit clarification be provided and that the voting thresholds be calculated based on the persons present and voting.

2.5.3 Proposed Norms

The following has been proposed:

• To revise the provisions to state that the voting count shall be in percentage terms (at least 60%) instead of proportionate terms (one and a half times).
• To revise the provisions to state that the voting count shall be in percentage terms (more than 50%) instead of proportionate terms (more than).
• To explicitly clarify, voting thresholds shall be calculated based on the persons present and voting.

2.6 Maintenance of Records in Electronic Form, along with Backup and Disaster Recovery Norms

2.6.1 Existing Norms

Section 4 of the Information Technology Act, 2000, specifically provides that where any law requires information or any matter to be in writing, typewritten, or printed form, such requirement shall be deemed fulfilled if such information or matter is rendered or made available in an electronic form and is accessible to be usable for a subsequent reference.

2.6.2 Recommendations by Working Group

The working group on EoDB submitted that Regulation 26(3) of the REIT Regulations provides guidelines for maintaining records in electronic form pertaining to REIT activity but does not extend to records mandated to be maintained by the manager.

Further, in the case of InvITs, Regulation 26(3) of InvIT Regulations provides that all records mandated to be maintained by the investment manager and the trustee must be in physical or electronic form.

2.6.3 Proposed Norms

It has been proposed that if records are maintained in electronic form by the manager of REIT/Investment Manager of InvIT and/or the trustee, they must ensure that they maintain adequate backup systems and data storage capacity. Further, they must have sufficient system capacity for handling data transfer and arrangement for alternative means of communication in case of Internet link failure.

Further, the REIT/investment manager of InvIT must also have a Business Continuity Plan (BCP) and Disaster Recovery (DR) in place to maintain data and transaction integrity.

3. Proposals for InvITs Only

3.1 Reduction in Trading Lot Size for Privately Placed InvITs

3.1.1 Existing Norms

Currently, as per Regulation 16(8)(b) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014, the current trading lot for secondary market trading for privately placed InvITs is set at Rs. 1 crore. Further, if the InvIT invests at least 80% of its asset value in completed and revenue-generating assets, this trading lot increases to Rs 2 crores (instead of Rs 1 crore).

3.1.2 Proposed Norms

Based on the Working Group’s recommendations, it has been proposed to reduce the trading lot size for trading units of privately placed InvITs on designated stock exchanges from Rs 1 crore/2 crores to Rs 25 lakhs.

3.2 Aligning Provisions Related to the Change in Sponsor for InvIT Regulations with REIT Regulations

3.2.1 Existing Norms

Regulation 22(7) of the InvIT Regulations prescribes the conditions for a change in sponsor or inducted sponsor. The explanation for this provision states that ‘change in sponsor or inducted sponsor’ means any change due to the entry of a new sponsor with or without the exit of an existing sponsor.

Similarly, the explanation of the similar provision for change in sponsor or inducted sponsor under REIT Regulations provides that change in sponsor or inducted sponsor shall mean any change due to the entry of a new sponsor or the exit of an existing sponsor.

3.2.2 Recommendations by Working Group

The working group has highlighted that the explanation to the provision for change in sponsor or inducted sponsor under InvIT Regulations needs clarity to provide that change in sponsor shall mean any change due to entry of a new sponsor or exit of existing sponsor in order to cover the aspect related to exit of existing sponsor without entry of new sponsor.

3.2.3 Proposed Norms

It has been proposed that Regulation 22(7) of the InvIT Regulations be amended by removing the phrases “with” and “without.” The revised explanation will define “change in sponsor or inducted sponsor” as any change resulting from the entry of a new sponsor or the exit of an existing sponsor. This amendment aims to eliminate ambiguity and ensure consistency across regulations.

1. Regulation 18(16)(c) of SEBI (Real Estate Investment Trusts) Regulations, 2014 and Regulation 18(6)(c) of SEBI (Infrastructure Investment Trusts)
2. Regulation 22(2)(c) of REIT and InvITs Regulations
3. Para 4.16 of SEBI Master Circular on REITs dated 26.04.2022 and Para 4.16 of SEBI Master Circular on InvITs dated 26.04.2022
4. Para 4.17.2 of SEBI Master Circular on REITs dated 26.04.2022 and Para 4.17.2 of SEBI Master Circular on InvITs dated 26.04.2022
5. Regulation 22 and 26ZM of REIT Regulations and Regulation 22 of InvIT Regulations