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Proposed Amendments to REIT Regulations

Finsec Law Advisors

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SEBI released a Consultation Paper for amendments to the SEBI (Real Estate Investment Trusts) Regulations, 2014, on July 18, 2016. The REIT Regulations that was notified on September 01, 2014, prescribes requirements for registration, listing, investment conditions, etc. for such Trusts which are popular in certain developed markets such as US and Japan.

The significant proposals in the consultation paper are discussed here: i) Allowing REITs to invest in holding companies which invest in other SPVs, which subsequently hold the real estate assets, subject to certain conditions, such as the REIT having a controlling interest in the holding company and requirements on related party transactions. This would be a welcome measure as real estate assets are generally held through multi-level holding structures. ii) Clarifying the definition of ‘associates’ to refer to only material associates and exclude entities that are not connected to the investment manager/sponsor. The existing definition imposes an unreasonable and onerous obligation on entities with which the parties to the REIT may not have any subsisting relationships, especially in light of the disclosure requirements on ‘associates’ of the sponsor, manager and trustee. iii) Clarifying the definition of ‘real estate property’ to include assets which are included under the definition of Infrastructure as per Ministry of Finance Notification, so long as they qualify as completed rent generating properties. The REIT Regulations seek to include rent generating properties, irrespective of the nature of the asset class. For instance, large townships may have hotels as part of the project, each of which may be completed and rent generating assets. iv) Increasing the number of sponsors from 3 to 5, where the holding in the REIT is only by the sponsor(s) and introducing the concept of ‘sponsor groups’ where the holding is by sponsor and other group companies of the sponsor. Usually, real estate assets are held by various companies/funds which may be under common control of a particular developer and the proposed measure would allow all such entities to participate in the REIT. v) Relaxing the requirements of related party transactions in line with the Companies Act, 2013. The current requirement of approval by 60% and 75% of unit holders in case of procedural matters and other matters (such as change in investment strategy), respectively, may be unfeasible, especially when related parties are required to abstain from voting. vi) Permitting REITs to invest up to 20% in under construction assets, as against the existing limit of 10%. This would provide greater operational convenience to the REIT manager and help broaden the portfolio.

The proposals in the consultation paper comprise a significant step forward in the creation of a more conducive regulatory framework for registration and functioning of REITs. Despite the tax benefits provided by the government in its budget, no REIT has been set up in India since market participants had issues with the existing regulations. The proposals are in the right direction as they would incentivise sponsors in coming together and setting up REITs.