Securities and exchange board of India.
ROLE OF SPONSORS IN REAL ESTATE INVESTMENT TRUSTS AND INFRASTRUCTURE INVESTMENT TRUSTS AND SPECIAL RIGHTS TO UNITHOLDERS.
The Securities and Exchange Board of India (“SEBI”) issued a consultation paper on the matter of providing special rights to unitholders of Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts(“InvITs”). The purpose of the consultation paper was to determine the following based on the comments received by them:
A. If certain unitholders are granted the privilege of nominating a board member to manager/investment manager, with the aim of empowering REITs and InvITs investors to oversee their investments and contribute to decision-making processes, what should be the minimum percentage of unit holdings required to qualify for such special nomination rights?
B. If the principles of the Stewardship Code, which is currently applicable to mutual funds, should be made applicable to members/nominees on the board of Manager/Investment Manager.
C. Role of sponsors and if self-sponsored REITs and InvITs are in the interest of unitholders.
The proposed changes are as follows:
1. There have been numerous representations made to SEBI that an independent element to the board of directors of the Manager/Investment Manager will surely go to enhance governance norms which will result in the unitholders having a greater say in the day-to-day activities of REITs and InvITs.
2. SEBI has proposed a requirement of a minimum 10% unit holding for a unitholder to nominate a member to the board of directors of Manager/Investment Manager. For every 10% of units held by the unitholder, he/she will be entitled to nominate 1 member to the board. However, this may lead to a large number of members being a part of the board of directors potentially causing inefficiency. To address this, SEBI has proposed to constitute a distinct unitholders council. Unitholders having less than 10% of units can merge together with other unitholders such that their collective units amount to 10%.
It is apposite to mention that in the event of the creation of a unitholder’s council, unitholders will not be able to nominate members to the board of directors of the REITs and InvITs. Members of the unitholder’s council would be responsible for ensuring that all decisions taken by the council are as per the REITs and InvITs Regulations, disclosures in the offer document and applicable laws.
Further, SEBI has proposed a number of changes to the role of the sponsor in REITs and InvITs, which are as follows:
1. A maximum cap on the locked-in units in terms of the amount.
2. Provisions for self-sponsored REITs/InvITs.
The revised lock-in requirements as proposed by SEBI are given below:
1. Up to 3 years 15% of total unit capital
2. 3-5 years, 5% of total unit capital or INR 1,000,00,00,000 (Indian Rupees one thousand crores), whichever is lower
3. 5-10 years, 3% of total unit capital or INR 1,000,00,00,000 (Indian Rupees one thousand crores), whichever is lower
4. 10-20 years, 2% of total unit capital or INR 1,000,00,00,000 (Indian Rupees one thousand crores), whichever is lower
5. Post 20 years, 1% of total unit capital or INR 1,000,00,00,000 (Indian Rupees one thousand crores), whichever is lower
It has also proposed a list of conditions to be met by Managers/Investment Managers to become a self-sponsored REITS/InvITs, a certain amount of flexibility for this has also been proposed by SEBI.
The acceptance of these proposed changes would result in the deletion of the declassification norms as per regulation 7A of the REITs Regulations and InvITs Regulations.