[Analysis] SEBI Introduces Unit-based Employee Benefit Scheme for REITs and InvITs
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- 11 Min Read
- By Taxmann
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- Last Updated on 20 July, 2024
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A unit-based employee benefit scheme grants employees unit options of Real Estate Investment Trusts (REITs) or Infrastructure Investment Trusts (InvITs). Eligible employees, excluding independent directors, can acquire these units through management fees, shareholder transfers, or market purchases with certain restrictions. The scheme's framework includes guidelines for implementation, disclosure requirements, and compliance with SEBI regulations. This scheme aligns employees' interests with the trust's performance, promoting transparency, governance, and fairness.
Table of Contents
- What is an ‘Employee Unit Option Scheme’?
- Meaning of Liquid Assets
- New Regulations for Employee Unit-Based Schemes in InvITs and REITs
- Framework for Unit-Based Employee Benefits Scheme for REIT/InvIT
- Insertion of new Schedules in SEBI Regulations for REITs and InvITs
- Conclusion
Introduction
The Securities and Exchange Board of India (SEBI) has introduced significant amendments to the regulations governing Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The SEBI (InvITs) (Second Amendment) Regulations, 2024, and SEBI (REITs) (Second Amendment) Regulations, 2024, bring about new norms primarily focused on the introduction of a unit-based employee benefit scheme known as the “employee unit option scheme.” These regulations aim to encourage better governance, transparency, and fair practices within India’s financial markets. The highlights of the amendment notification are discussed hereunder:
Amendment notification introduces the definitions of “Employee Unit Option Scheme” and “liquid asset” by inserting the new clauses under Regulation 2(1) of the SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014.
1. What is an ‘Employee Unit Option Scheme’?
“Employee unit option scheme” means a scheme under which the investment manager grants unit options to its employees through an employee benefit trust[1].
Explanation. – For the above purpose, employees of the investment manager shall include all directors of the investment manager except independent directors.”
2. Meaning of Liquid Assets
“Liquid Asset” means cash, units of overnight or liquid mutual fund schemes, fixed deposits of scheduled commercial banks, government securities, treasury bills, repo on government securities and repo on corporate bonds[2].”
| Comments |
| Defining the “Employee unit option scheme” clearly outlines who is eligible for the unit options, ensuring transparency and fairness of the scheme. Moreover, the inclusion of a definition of “liquid assets” clarifies what constitutes readily available funds for investment managers. |
3. New Regulations for Employee Unit-Based Schemes in InvITs and REITs
New Sub-Regulation (28) under Regulation 10 of SEBI (Infrastructure Investment Trusts) Regulations, 2014, and New Sub-Regulation (29) under Regulation 10 of SEBI (Real Estate Investment Trusts) Regulations, 2014, have been inserted to allow the investment manager to offer unit-based schemes for its employees on the units of InvITs and REITs.
| Comments |
| The inclusion of this regulation provides a mechanism for the issuance and administration of InVITs & REITs to employees. This regulation will facilitate investment managers in decision-making while offering the unit-based scheme to employees. |
4. Framework for Unit-Based Employee Benefits Scheme for REIT/InvIT
Chapter IVB and Chapter IVA have been inserted to the respective regulations to provide the framework of Unit Based Employee Benefit Scheme on the units of the InvIT and REITS respectively. This framework provides the manner of allotment or transfer of units to employee benefit trust, the role of the nomination and remuneration committee, variation in terms of the scheme, disclosures, and other requirements. A framework for a unit based employee benefit scheme for REIT/InvIT has been discussed in detail hereunder:
4.1 Applicability of the framework for Unit-Based Employee Benefit Scheme
The rules of these new chapters shall apply to new unit-based employee benefit schemes introduced after the chapter takes effect or schemes introduced prior to this chapter coming into force but acquired by any employee benefit trust after the date of this chapter coming into force.
For existing schemes that were introduced before this chapter came into force, only the disclosure requirements apply.
| Comments |
| The framework clearly outlines the provisions which are applicable to new units and existing units. |
4.2 Nature of scheme and implementation of scheme through trust
The nature of the scheme is same as employees unit options scheme.
Offering this scheme shouldn’t create extra costs for the InvIT (Investment Trust), its holding company (HoldCo), or its special purpose vehicles (SPVs).
The scheme must be set up through a special employee benefit trust created by the investment manager.
The investment manager is required to ensure that the trust deed contains certain provisions specified under these regulations.
| Comments |
| The scheme is structured to create no additional cost for investment trusts or SPVs. Further, the structure shall facilitate easier adoption and understanding among employees and stakeholders.
Under the scheme’s framework, the investment manager is responsible for ensuring that the trust deed includes specified provisions that enhance regulatory compliance and governance. These provisions shall ensure that the scheme is operated within established legal and ethical boundaries and protect the interests of both employees and unit holders. |
4.3 Manner of receiving units by the employee benefit trust
The trust can receive units in the following ways for the purpose of offering unit based employee benefit scheme:
4.3.1 Primary Mode of acquisition of units of REIT/InvIT
| Sl. No. | Heading | Detailed Provision |
| 1. | Management Fees | The investment manager may receive part of their management fees in units of InvIT for use in the benefit scheme. |
| 2. | Transfer of Units by Shareholders | Shareholders of the investment manager can transfer their units to the trust. |
| 3. | Transfer of Units by Investment Manager | The investment manager can directly transfer units to the trust. Transfers must be irrevocable and made as gifts (no payment involved). |
| 4. | Ineligible Units for Transfer to Trust | Subordinate units cannot be transferred to the trust or used in the benefit scheme. |
| 5. | Management Fees | The investment manager may receive part of their management fees in units of InvIT for use in the benefit scheme. |
4.3.2 Secondary mode of acquisition of units of REIT/InvIT
| Sl. No. | Heading | Detailed Provision |
| 1. | Restriction on trading of units of the REIT/InvIT
|
The employee benefit trust cannot use units of the REIT/InvIT for trading purposes. |
| 2. | Limit on Acquisition of units
|
A secondary acquisition in a financial year cannot exceed 2% of the total outstanding units from the previous financial year. |
| 3. | Overall Holding Limit from Secondary Acquisition
|
Employee benefit trusts can not acquire more than 5% of the total outstanding units as of the end of the prior financial year through secondary acquisitions.
This limit excludes units from new issues or gifts. |
| 4. | Requirement of Unit holders’ Approval | The investment manager must obtain the approval of the Unit holder for secondary acquisitions. |
| 5. | Minimum Holding Period | Employee benefit trust must held units for a minimum of six months. |
| 6. | Disclosure Requirement | The employee benefit trust shall disclose the period during which it plans to undertake the secondary acquisition, in advance of at least seven working days (excluding the date of intimation and the date of start of such period), to the recognised stock exchanges and the depositories. |
| 7. | Employee Restrictions | Employees of the investment manager cannot sell units during the period given to make disclosure to stock exchange. |
| 8. | Employee Details Submission | The investment manager must submit a list of employees, including their Income Tax Permanent Account Number, at least seven working days before the acquisition period. |
| 9. | Lock-in Period | Depositories will enforce a lock-in on the holdings of employees. lock-in shall be released after the period during which the employee benefit trust plans to undertake the secondary acquisition |
| Comments |
| These guidelines shall ensure regulatory adherence and operational efficiency through mandatory approvals, disclosure requirements, employee restrictions and limits on the acquisition of units. |
4.4 Manner of allotment of units to the employee benefit trust
| Sl. No. | Heading | Detailed provision |
| 1. | Obtain approval of unit holders | Approval of unit holders is required before issuing units to the trust. |
| 2. | The time period for Issuance | Units to the employee benefit trust shall be issued only once per financial year and within 90 days after the annual valuation. |
| 3. | Compliance with Guidelines | Issuance of units must in accordance with the guidelines for preferential issue of units as specified by the Board. |
| 4. | Direct Allotment | Units must be allotted directly to the employee benefit trust for the exclusive use of the unit-based employee benefits scheme. |
| Comments |
| The framework provides clear guidelines for the manner of allotment or transfer of units to employee benefit trusts. Allotment of units within the specified time period and with the approval of unit holders shall ensure that the scheme is implemented effectively. |
4.5 Role of nomination and remuneration committee (NRC)
| Sl. No. | Heading | Detailed provision |
| 1. | Administration of Scheme | NRC is Responsible for the administration and oversight of the unit-based employee benefit scheme. |
| 2. | Formulation of Terms and Conditions of the scheme | NRC shall Formulate detailed terms and conditions of the scheme, including provisions specified in Part B of Schedule IX of these regulations. |
| 3. | Ensure the Compliance of securities law | NRC shall Develop policies and procedures to ensure compliance with all securities laws.
|
| Comments |
| These guidelines requires that the terms of the scheme shall be formulated in accordance with the provisions of these regulations. Further the framework makes NRC responsible to administer and oversight the formulation of the scheme and ensure the regulatory compliances. |
4.6 Variation of terms of the scheme
| Sl. No. | Heading | Detailed provision |
| 1. | Variation of Terms | Investment manager may vary the scheme terms if the change is not detrimental to employees’ interests. |
| 2. | Unit holder Approval | The investment manager shall obtain approval from unit holders before varying the terms of the scheme. |
| 3. | Legal/Regulatory Changes | Investment manager may Vary the terms to fulfil legal or regulatory obligations without obtaining the approval of unit holders. |
| 4. | Details of Explanatory Statement | Explanatory statement to the notice for resolution must disclose the complete details of the variation of terms and rationale therefor and the details of beneficiaries employees. |
| 5. | Repricing Options | The investment manager may reprice unexercised options due to a fall in unit price in the stock market.
The investment manager shall ensure that such repricing is not detrimental to the interests of the employees and approval of the unitholders has been obtained for such repricing. |
| Comments |
| These provisions shall ensure regulatory adherence, operational efficiency, and safeguard the interests of Unitholders through mandatory approvals for variations in scheme terms. They will also ensure that any potential impact on unitholder returns or governance structure is carefully considered. |
4.7 Immediate Listing of Units on Stock Exchange
Issue of new units shall be listed immediately on all recognised stock exchange(s) where the existing units are listed if the scheme complies with these regulations and the investment manager has obtained the in-principle approval from the recognised stock exchange.
| Comments |
| Listing of new units on all recognised stock exchanges shall increase liquidity, easier access of investors to trade the new units across different platforms and facilitates better price discovery of Unit-Based Employee benefits Scheme of REITs and InvIT. |
4.8 SEBI Registered Trustee Requirement and Voting Restrictions for Employee Benefit Trust
The trustee of the employee benefit trust must be a trustee registered with SEBI. Trustee of the REIT/InvIT shall not act as the trustee of the employee benefit trust and shall not be eligible to vote on account of the units of the InvIT held by such trust.
| Comments |
| The requirement for the trustee of the employee benefit trust to be registered with SEBI ensures that they meet specific standards of governance, competence, and regulatory oversight. This could potentially enhance the governance framework of the Unit-Based Employee Benefits Scheme of REITs and InvIT.
The restriction on voting rights for trustees of REITs/InvITs on units held by employee benefit trusts ensures that decisions are made in the interest of stakeholders rather than trustees managing employee benefits. |
4.9 Applicability of SEBI norms to Investment Managers, Directors & Related Parties
The provisions of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India(Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 shall be applicable to the following:
- Investment manager,
- directors,
- key managerial personnel,
- sponsor,
- recipients of units under the unit-based employee benefit scheme,
- the employee benefit trust and
- trustee of the employee benefit trust.
The relaxations and exemptions provided under the SEBI (Prohibition of Insider Trading) Regulations, 2015, in relation to employee stock option schemes shall mutatis mutandis apply to the unit-based employee benefit scheme offered in accordance with this chapter.
However, the restriction of trading window restrictions specified under the SEBI (PIT) Regulations, 2015 shall not apply in respect of units of InvIT to the employee benefit trust in lieu of management fees.
| Comments |
| The applicability of SEBI regulations for Prohibition of Insider Trading ensures that they adhere to strict standards of conduct and governance to prevent insider trading and fraudulent practices, promoting market integrity. Further, Exemptions from trading window restrictions for certain transactions facilitate smoother operations in managing employee benefit trusts. |
4.10 Other requirements
| Sl. No. | Heading | Detailed provision |
| 1. | Purpose of Units | Units held by the employee benefit trust can be used only to offer a unit-based employee benefit scheme. |
| 2. | Restrictions on transfer of units | The trust cannot transfer or sell units except to provide employee benefits as per the scheme. |
| 3. | Lock-in Period | The depository will lock in units transferred to the employee benefit trust.
The depository shall release the units only for the transfer of units to an investment manager employee. |
| 4. | Minimum Vesting Period | There is a minimum vesting period of one year for the unit-based employee benefit scheme. |
| 5. | Appropriation of Units | Unappropriated inventory of units acquired through secondary acquisition must be appropriated within a reasonable period but not exceeding the end of the subsequent financial year or the second subsequent financial year. |
| 6. | Disclosure Requirements | No scheme shall be offered unless the investment manager provides disclosures to prospective option grantees as specified in Part G of Schedule IX. |
| 7. | Accounting Standards Compliance | The investment manager must follow accounting requirements, including disclosure requirements of Accounting Standards prescribed by the Central Government in terms of section 133 of the Companies Act, 2013, and any relevant guidance notes. |
| 8. | Determination of Exercise Price | The investment manager can determine the exercise price for options granted, adhering to accounting policies |
| 9. | Unit holder Approval Information | The explanatory statement annexed to the notice for convening a meeting to obtain approval of unit holder must include information specified in these regulations or as directed by the Board. |
| 10. | Cash Management | Cash accumulated by the employee benefit trust must be deployed in unencumbered liquid assets. |
| 11. | Disclosure of Unit holding | The unit holding of the employee benefit trust shall be classified as “non-sponsor and non-public” for disclosure purposes to recognized stock exchanges. |
| 12. | Change in Investment Manager | Upon change, the outgoing investment manager will not receive management fees or units from the REIT/InvIT and cannot offer new unit-based employee benefit schemes. |
| 13. | Disposal of Units in case of change of investment manager | In case of a change in the investment manager, The employee benefit trust of the outgoing investment manager must sell or dispose of its units within six months from the date of change in the investment manager. |
| Comments |
| These requirements aim to enhance governance, transparency, and fairness in the implementation and operation of REITs/InvITs units. They provide clear guidelines for managing employee benefits through various approvals, disclosures and regulatory compliances such as minimum vesting period, applicability of accounting standards and restriction on trust to transfer the units. |
4.11 Disclosure of Unit-Based Employee Benefits Scheme in Annual Report
The investment manager shall disclose details of the unit-based employee benefits scheme, including the value of options granted under a unit-based employee benefits scheme as a part of its employee compensation being implemented in the Annual Report.
| Comments |
| Disclosing the details of unit-based employee benefit scheme in the Annual Report shall promote transparency, accountability, and trustworthiness while ensuring compliance with regulatory standards. It provides stakeholders with a comprehensive view of the company’s scheme and supports informed decision-making by investors and other interested parties. |
5. Insertion of new Schedules in SEBI Regulations for REITs and InvITs
New Schedule, Schedule IX within SEBI (Real Estate Investment Trusts) Regulations, 2014 and Schedule X under SEBI (Infrastructure Investment Trusts) Regulations, 2014, has been inserted. These schedules provide the following:
- Minimum contents of the trust deed
- Terms and conditions for formulation of schemes
- Contents of the explanatory statement on the notice of the meeting
- Submission of information to the stock exchange
- Undertaking by the investment manager
- Format of notification/disclosures for issue of units
- Disclosures to be made in the Annual Report
| Comments |
| The impact of these schedules is aimed to standardising practices, improving regulatory compliance, and enhancing investor confidence in REITs and InvITs operating under SEBI regulations. |
6. Conclusion
SEBI’s new norms for unit-based employee benefit schemes in REITs and InvITs aim to enhance transparency, governance, and fair practices. By introducing structured frameworks, detailed compliance requirements, and stringent disclosure norms, these amendments ensure better alignment of employee interests with trust performance. These measures are poised to foster greater trust and efficiency within India’s financial markets.
[1] Clause (oa) of Regulation 2(1) SEBI (Infrastructure Investment Trusts) Regulations, 2014 and clause (1a) of SEBI (Real Estate Investment Trusts) Regulations, 2014
[2] Clause (zca) of Regulation 2(1) SEBI (Infrastructure Investment Trusts) Regulations, 2014 and Clause (ta) of SEBI (Real Estate Investment Trusts) Regulations, 2014
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