The concept of Real Estate Investment Trusts (REITs) has been seen across the world since a lot of years. However, it is a new concept in India. The Securities and Exchange Board of India (SEBI) recently framed the SEBI (REITs) Regulations, 2014 (REIT Regulations) for the regulation of REITs in India.
REITs basically pool money from investors and invest them in income-generating assets offering investors a way to diversify their portfolios by investing in property. This gives an opportunity to those people to invest in the real estate who cannot otherwise afford to invest in the expensive real estate sector. REITs will be registered and listed on the stock exchange. The units issued in return of investor’s investment (i.e. unit holders) will be trade on the stock exchange like securities.
“Participation in REITS extends beyond financial returns. It assists socio-economy objectives of filling the gaps on the rising need of affordable dwelling for masses and helping balance urbanization by aiding creation of smart cities with economic and superior quality of life”, was rightly held by Mr. Bharat Banka at the time he was CEO at the Aditya Birla Private Equity.
Briefly, some key aspects of the REIT Regulations are covered in this article to understand the working of REITs in India.
For grant of certificate of registration as a REIT, an application in the prescribed form1 accompanied by non-refundable prescribed fee2 has to be made with the SEBI.3 The applicant has to be a trust with a registered trust deed4 and such trust deed is required to have the main objective as undertaking activity of REIT in accordance with the REIT Regulations5. On considering the application, SEBI may reject it after giving reasonable opportunity to the applicant and the decision to reject has to be communicated to the applicant within 30 days of such decision.6 The registration could also be granted with such conditions as the SEBI would consider appropriate.
The important roles with regards to a REIT would be played by ‘sponsor’, ‘manager’ and ‘trustee’. ‘Sponsor’ would be the one to set up the trust. ‘Manager’ would be a company or LLP or body corporate incorporated in India which manages assets and investments of the REIT and undertakes operational activities of the REIT. ‘Trustee’ would be the one to hold the REIT assets in trust for the benefit of unit holders. All of these three have to be separate entities7 and all of them have to meet the specific requirements as required by the REIT Regulations8. Further, the REIT Regulations clearly provide the roles and responsibilities of all of them along with the role and responsibilities of a ‘valuer’ (who would be appointed by the manager to undertake valuation of the REIT assets) and ‘auditor’ as well.9
The REIT Regulations permit a maximum of 3 sponsors. The sponsors are required to hold a minimum of 25% of the total units of the REIT after initial offer on a post-issue basis for at least 3 years from the date of listing of such units and if the holding requirement exceeds the minimum then for at least 1 year from the date of listing of such units. Further, sponsors together are required to hold minimum 15% of the outstanding units of the listed REIT at all times and individually each sponsor is required to hold minimum 5% of the outstanding units of the listed REIT at all times.
There are various other requirement provided under the REIT Regulations. There is a requirement for the value of assets owned by REIT to not be less than INR 500 crore.10 Further, the initial offer size of units is required to be not less than INR 250 crores.11 However, these two requirements can be complied with after the initial offer subject to: a binding agreement with the relevant party(ies) that the requirements would be fulfilled prior to allotment of units; a declaration to the SEBI and the designated stock exchanges to that effect; and adequate disclosures in this regard in the initial offer document.12 Further, REIT Regulations for the purposes of initial offer of units, require the units proposed to be offered to the public to be minimum 25% of the total outstanding units of the REIT and the units being offered by way of offer document13. However, for initial offer of more than INR 500 crores, if prior to the initial offer units are held by public, the units proposed to be offered to the public should be calculated after reducing such existing units.14
In relation to the subscription, the minimum subscription requirement for an initial offer and follow-on offer is required to be INR 2 Lakh for an applicant.15 The REIT would have to refund money: (a) to all applicants in case it fails to collect subscription amount exceeding 75% of the issue size16; (b) to all applicants in case the number of subscribers to the initial offer forming part of the public is less than 200; and (c) to the extent of oversubscription in case the moneys received is in excess of the extent of over-subscription17 subject to the right to retain such over subscription not exceeding 25% of the issue size.18 Further, the REIT Regulations require the trading lot for the purpose of trading of units of the REIT to be INR 1 Lakh.19
The REIT Regulations also provide the investment conditions and distribution policy. As per these regulations, minimum 90% of net distributable cash flows of the REIT are required to be distributed to the unit holders.20Such distributions are to be declared and made at least once every 6 months in every financial year.21 The distributions declared have to be made within 15 days of such declaration and failure to make distributions within 15 days of the declaration will make the manager liable to pay interest to the unit holders at the rate of 15% per annum till the distribution is made.22
1 Form A specified in the Schedule I to the REIT Regulations.
2 Manner of fee specified in the Schedule II to the REIT Regulations.
3 Regulation 3 of the REIT Regulations.
4 Registration of the trust deed under the provisions of the Registration Act, 1908.
5 Regulation 4(2)(a) and (b) of REIT Regulations.
6 Regulation 8 of REIT Regulations.
7 Regulation 4(2)(c) of the REIT Regulations.
8 Regulations 4(2)(d), (e) and (f) of the REIT Regulations.
9 Regulations 9 to 13 of the REIT Regulations.
10 Regulation 14(2)(b) of the REIT Regulations.
11 Regulation 14(2)(d) of the REIT Regulations.
12 Proviso to Regulation 14(2) of the REIT Regulations.
13 Regulation 14(2)(c) of the REIT Regulations.
14 Proviso to Regulation 14(2)(c) of the Regulations.
15 Regulation 14(14) of the REIT Regulations.
16 as specified in the initial offer document or follow-on offer document.
17 as specified in the initial offer document or follow-on offer document.
18 Regulation 14(20) of the REIT Regulations.
19 Regulation 16(4) of the REIT Regulations.
20 Regulation 18(16)(b) of the REIT Regulations.
21 Regulation 18(16)(c) of the REIT Regulations.
22 Regulations 18(16)(c) and (e) of the REIT Regulations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.