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SEBI eases rules for REITs, InvITs; may tighten disclosure norms for PIPE deals

23 September, 2016

The Securities and Exchange Board of India on Friday said it will consider framing rules for listed companies backed by private equity firms to seek approval from shareholders for compensation pacts with founders, directors and top management.

The capital markets regulator said that instances of PE funds entering into compensation agreements with promoters, directors and key managerial personnel of listed investee companies, based on performance of such companies have recently come to light.

“However, when such reward agreements are executed without prior approval of shareholders, it could potentially lead to unfair practices,” SEBI said in a statement after a meeting of its board.

The regulator said it will start public consultation on corporate governance issues in compensation agreements in case of listed companies. It will seek public comments on requiring adequate disclosures and prior approval of shareholders in such cases and public dissemination of profit-sharing agreements.

The SEBI board also took a number of other decisions governing real estate investment trusts (REITs), infrastructure investments trusts (InvITs), offshore fund managers, foreign ownership in local stock exchanges and allowing foreign portfolio investors to invest directly in corporate bonds.

REITs, InvITs get a push

SEBI allowed REITs and InvITs to invest in two-level (special purpose vehicle) structures through a holding company. This is subject to sufficient shareholding in the holding company and the underlying SPV.

It removed the limit on the number of sponsors. Currently, three sponsors are required. Besides, such trusts are allowed to have the right to appoint majority directors in the SPV.

Further, the holding company would be allowed to distribute 100% cash flow realised from underlying SPVs and at least 90% of the remaining cash flow.

Regarding REITs, SEBI proposed to allow such trusts up to 20% investment by such trusts in under-construction projects, up from 10% currently.

SEBI also proposed to rationalise the requirements under related-party transactions, under which approval of 60% unit holders apart from related parties, is required for passing a related-party transaction.

With regard to InvITs, SEBI approved a proposal to reduce the mandatory sponsor holding in InvIT to 15%. It also rationalised the requirements for private placement of InvIT.  

SEBI had notified the REIT and InvIT regulations in 2014, allowing setting up and listing of such trusts, which are very popular in some advanced markets. However, no trust has been set up so far as investors wanted more measures, including tax breaks, to make these instruments more attractive.

Red carpet for fund managers

To make it easier for foreign fund managers keen to relocate to India, SEBI decided to allow them to act as portfolio managers under a relaxed regulatory regime.

The move assumes significance in the wake of the government already having announced tax incentives for offshore fund managers willing to relocate to India.

Under the new rules, SEBI has decided the procedure for registration of an existing foreign based fund manager desirous of relocating to India or a fresh applicant to function as an Eligible Fund Manager.

SEBI said rules regarding mandatory agreement between the portfolio manager and overseas fund, reporting about overseas fund and minimum investment requirements (Rs 25 lakh) would not be applicable for such overseas funds.

After the announcement in the Union Budget, a new section was added to the Income Tax Act to provide that the fund management activity carried out through an Eligible Fund Manager (EFM) located in India and acting on behalf of an Eligible Investment Fund (EIF) would not constitute business connection in India of such a fund.

Also, an existing SEBI-registered portfolio manager will be allowed to act as EFM with prior intimation from SEBI and subject to certain conditions.

SEBI has also put in place a procedure for registration of an existing foreign fund manager desirous of relocating to India, or as a fresh applicant.

Such applicants will be granted registration as portfolio managers to act as an EFM, provided they meet existing eligibility norms of being a body corporate, having a net worth of Rs 2 crore, appointment of a Principal Officer and minimum two employees with requisite credentials.

The EFMs would be required to segregate the funds and securities of the EIFs from that of other clients and provide information to SEBI on a quarterly basis.

(With PTI inputs)

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SEBI eases rules for REITs, InvITs; may tighten disclosure norms for PIPE deals

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