India financial markets regulator the Securities and Exchange Board of India has further relaxed norms for investment requirements into real estate and infrastructure investment trusts (REITs and InvITs) as public offerings by such trusts have failed to generate investor interest.
On Friday, SEBI allowed strategic investors such as international multilateral financial institutions and non-banking financial companies (NBFCs) to invest up to 25% of total offer size in such trusts.
The minimum investment is capped at 5% besides having a 180-day (six-month) lock-in from the listing date on units subscribed by strategic investors.
SEBI said the manager on behalf of the InvITs and REITs will sign a binding unit-subscription agreement with the strategic investor whose proposed subscription details would be required in offer documents.
The move follows last month’s board meeting where the market regulator allowed such trusts to invest at least 50% stake in holding companies subject to certain safeguards.
In the September board meeting, SEBI even allowed these trusts to raise funds by issuing debt securities.
REITs and InvIT regulations were notified roughly four years ago when SEBI allowed setting up and listing such trusts. However, not a single REIT has been listed in the country. Two InvITs went public last year but their performance has been lacklustre. This also deterred other InvITs from floating their IPOs.
VCCircle had reported that billionaire Gautam Adani-controlled Adani Group had called off plans to float an InvIT for its power transmission arm anticipating few takers.
In early May, road developer IRB Infrastructure Developers Ltd became the first Indian company to tap the markets with an InvIT. Several large foreign institutions, including Singapore’s sovereign wealth fund GIC, Australia’s Platinum Asset Management and the UK’s National Westminster Bank, lined up for anchor allocation. The IPO, too, saw good demand.
The IRB InvIT Fund, however, made a muted stock market debut with its units listing at a slight premium to the fund’s initial offer price. That also rubbed off on Sterlite Power Grid Ventures’ IndiGrid InvIT whose public offer coincided with IRB InvIT’s listing. Sterlite Power’s InvIT fared even worse, with the IPO struggling to find investors.
In its December board meeting, SEBI allowed such trusts to invest at least 50% stake in holding companies subject to certain safeguards. This included the existing requirement of REITs to have ultimate holding interest of at least 26% in the underlying SPV.
Among other criteria, REIT manager, in consultation with the trustee, would need to appoint at least such number of directors on the board of holding company or SPVs, in proportion to the shareholding or interest such entity.
Further, in case of any inconsistencies between any shareholder or partnership agreement and the obligations cast upon REIT in the norms, the provisions of the REIT regulations would prevail.
Besides, SEBI has decided to rationalise the definition of sponsor group in case of REITs. It has proposed to enable investments by REITs in unlisted shares under the 20% investment category. The board of SEBI has approved minor amendments to the REIT and InvIT (Infrastructure Investment Trust) Regulations for harmonisation of the terms and definitions in the norms.
Amendment to REIT regulations
The SEBI board has decided to have further consultations with stakeholders on a proposal to allow REITs to invest at least 50% stake in the underlying holding company. Similarly, it has allowed a holding company with at least 50% stake to invest in the underlying special purpose vehicle.
The regulator has also decided to amend the definition of ‘valuer’ for both REITs and InvITs. It had notified the REITs and InvITs Regulations in 2014, allowing setting up and listing of such trusts which are popular in more advanced markets.
In order to be eligible, a valuer is required to have at least five years’ track record of valuing infrastructure assets. However, SEBI’s statement did not clearly highlight the proposed changes of the definition.
SEBI also allowed REITs to lend to underlying holding company or a special purpose vehicle (SPV).
“After deliberations, the board decided to have further consultation with the stakeholders on a proposal of allowing REITs to invest at least 50% of the equity share capital or interest in the underlying hold-co/SPVs, and similarly allowing holding company to invest with at least 50% of the equity share capital or interest in the underlying SPVs,” SEBI said.
Past exemptions, ease of regulations
Earlier, investors were relieved by a Budget proposal that exempt investors from paying dividend distribution tax in such trusts.
REITs earn rental income from the properties held by it. The income generated by the trust is passed on to investors as dividend income among other gains or profits.
SEBI regulations defined a REIT as a trust that can own a property either directly or through an SPV, which would go on to own a property. Since the trust or the SPV is liable to distribute 90% of their income, they were subject to distribution tax on such income.
However, in the last year’s Budget, Finance Minister Arun Jaitley allowed a ‘pass-through’ status to REITs. This meant that investors do not have to worry about any additional tax embedded in the structure.
SEBI had come out with draft guidelines for the new investment vehicle in October 2013. The regulator deferred a final decision on account of ambiguity on the taxation of the new vehicle. It eventually gave a go-ahead to REITs in 2014.