New Delhi: With an aim to make REITs more attractive to investors and real estate players, regulator Sebi today proposed relaxed norms for related party transactions and allowed these Trusts to invest more in under-construction assets.
Sebi also proposed removal of restrictions on REITs (Real Estate Investment Trusts) relating to investment in special purpose vehicle (SPV) structures while norms relating to related party transactions would also be eased.
The proposed move would allow up to 20 per cent investment by REITs in under-construction projects, up from a maximum of 10 per cent allowed currently. Besides, relaxations would be made to provisions relating to compliance of minimum public holding norms as also for investments by associate entities of trustees, as per the consultation paper.
The draft papers have been put in place after Sebi's board last month approved a proposal for issuance of a consultation paper to amend the REIT regulations. The Securities and Exchange Board of India (Sebi) has sought public comments on the consultation paper till August 7 and final norms will be framed after taking into account suggestion of all the stakeholders.
Sebi had notified the REIT Regulations in 2014, allowing setting up and listing of such Trusts, which are very popular in some advanced markets. However, no single Trust has been set up as yet as investors wanted further measures, including tax breaks, to make these instruments more attractive.
While the government provided for certain tax benefits in the Budget this year, Sebi has now proposed to relax the rules. India's real estate sector has grown rapidly in recent years and the growing scale of operations of the corporate sector has increased demand for commercial buildings, office spaces, shopping centres, warehouses and conference centres.
For such assets, REITs have been preferred investment vehicles globally and can be so in India too. One of the major proposals relates to allowing REITs to invest up to 20 per cent in under-construction projects while at least 80 per cent should continue to be invested in completed and rent-generating properties.
"REIT may be permitted to invest up to 20 per cent of value of the REIT assets in under-construction assets, securities of companies or body corporate in real estate sector, government securities, money market instruments etc.
Further, the current requirement of at least 80 per cent investment in completed and rent generating properties shall continue as it is," the draft paper noted.
The proposal would provide greater flexibility to the REIT manager in determining the composition of REIT and also help widen the portfolio and the size of REIT by adding projects that are at various stages of construction.
Also, if some part of an under-construction property has got Occupancy Certificate, that portion would be considered 'completed property' and the remainder would be 'under-construction' property.
Among the proposed changes, Sebi plans to remove the restriction on an SPV to invest in other SPVs holding assets, which in turn would allow REITs to invest in a holding company owning stake in SPVs.
It is being proposed that the REIT would hold controlling interest and at least 50 per cent equity in the holding company, which in turn can hold controlling interest and at least 50 per cent equity in an underlying SPV.
A large proportion of real estate projects in India is financed by financial institutions on a project-finance basis where lenders require a pledge on shares of the SPV. Currently, an SPV is required to hold at least 80 per cent of its assets directly and cannot invest in other SPVs.
Another move is to allow the REITs to have up to five sponsors as against the current norm for a maximum three. Besides, a sponsor can have REIT holdings with its group companies or associates, all of whom would be counted as one.
It was felt that the current norms were restrictive in the case of a sponsor group holding interest through group firms or individuals. Sebi also proposed rationalising the requirements under the related party transactions, under which approval of 60 per cent unitholders apart from related parties is required for passing a transaction.
Now, it has been proposed that the number of votes cast by the unitholders in favour of the proposal shall be more than the number of votes against it. At present, approval of 75 per cent unitholders is required, apart from related parties, for passing special resolutions such as change in investment manager, investment strategy and delisting of units.
Now, "it is proposed that the number of votes cast by the unitholders in favour of the proposal shall be at least one and half times more than the number of votes cast by the unitholders against it".
"Further in both the above cases, the voting by any person, who is a related party in such transactions, as well as associates of such person(s) shall not be taken into account," the proposal noted.
Regarding the pricing of related party transactions for purchase/sale of real estate assets, Sebi has proposed that the property shall not be purchased at a value greater than 110 per cent of the average of the two independent valuations.
"In case of a sale transaction, the property shall not be sold at a value less than 90 per cent of the average of the two independent valuations," it added. Another provision requires that units offered to the public should be at least 25 per cent. This would be aligned with Sebi regulations about the public offer size of 25 per cent, or 10 per cent initially, with an eventual raising of public holding to 25 per cent.
In the case of change in control of sponsor entity on account of a sale, if the number of unitholders, other than related parties, falls below 200 or the public float slips below 25 per cent, the trustees are required to seek a delisting.
This provision would be relaxed by allowing the new sponsor a 1-year window to comply with the minimum public holding requirements by secondary sale or dilution through a fresh issuance of units.
Changes would be made in rules governing the trustees and associates as well, pursuant to which associates of the trustees would no longer form part of the parties to the REIT.
Besides, associates of trustees would be allowed to invest in units of such REIT, subject to such transactions being conducted at an arm's length. "To rationalise the ambit of the definition of associates so that entities that have no connection to the investment manager/sponsor doesn't get included in the definition of associates," Sebi noted.
Also, the disclosure of litigations related to associates of trustee would not be required to be given. Sebi had also received representations that the rules do not have an explicit provision with respect to the liability of unitholders.
Accordingly, Sebi has decided to clarify that the unitholder would be an investor and its rights and obligations would be limited to the amount of its investment. Also, a developer would be allowed to function as a sponsor if at least two projects of the sponsor, or its associates, have been completed.
The current norms do not provide the leeway of associates' projects being considered.It is proposed that in the case of the related party transaction, the trustee will have to obtain confirmation or a fairness opinion from a practising chartered accountant or a valuer, as the case may be.
