REITs in India - A prescription for regulatory inoculations and booster shots

In our previous piece , we had gazed into our crystal ball for predictions on the future of REITs in India, specifically in light of the ongoing Covid-19 pandemic and its aftermath. However, putting the largely untameable forces of macroeconomic factors, sectoral outlooks and market perceptions aside, there are some regulatory changes which, if introduced by the relevant regulators in a timely manner, could provide the real estate sector and specifically, REITs in India, with the necessary shot in the arm to thrive in the times to come. Set out below is a short wish-list.

 Inoculations for immunity in the short term

  • A REIT presupposes the holding of eligible ‘real estate’ assets, and what real estate assets are, is, to an extent, limited to commercial rent or income generating assets. With forecasts pegging newer asset classes such as hospitals, warehouses and data centres to perform favourably in the coming months, an amendment which re-evaluates the traditional end-use based classification of assets as ‘real estate’ or ‘infrastructure’; and propose a more holistic business model based assessment to enable REITs of different asset classes which otherwise meets the requirements of being completed and income generating, would be welcome.
  • Given the potential scarcity of viable sources of funding in the coming months, a number of nits in the existing regulatory framework need to be ironed out, both from the perspective of SEBI or the REIT Regulations, as well as from other regulators/regulations. This would entail, inter alia, clarifications regarding (i) REITs being eligible borrowers under the ECB framework; (ii) rationalising end use restrictions suitable for REITs under the ECB framework; (iii) the ability of FPIs and insurance companies to subscribe to debt issued by listed REITs; and (iv) the ability of commercial banks to lend to REITs.
  • REITs would also benefit from specific relaxations/clarifications being contemplated for capital raising by listed companies, including relaxations proposed to the mandatory cooling-off period between two capital raises; and guidance on holding unitholder meetings to consider special business items during the quarantine period etc.
  • With the pandemic poised to decelerate construction activity in the short to medium-term impact lease rentals and impact existing commercial real estate valuations, a re-look at some of the (continuing) eligibility conditions may provide existing and new issuers with some breathing space in difficult times. These conditions include temporary reduction in the existing split between completed, income generating assets and other investments from the current 80-20 to a lower threshold,  expanding the scope of the permissible investments under the 20% bucket, and rationalisation of the minimum prescribed asset size of the initial portfolio (presently Rs 500 crore).

Additional booster shots for sustained well-being in the medium to long-term

  • Indian REITs would require guidance on the process to be followed for amending NDCF frameworks to enable nimbleness in the face of changing economic conditions. Clarifications and relaxations on the timing, mode and manner of upstreaming NDCF to the REIT, the manner in which REITs should deal with cash flows received from SPVs until distribution, and on the 10% NDCF accumulated with REITs on an ongoing basis post-distributions will also be welcome changes.
  • Takeover triggers in the context of REITs will also need to be addressed. Given the nuances of REIT holding structures and the bifurcation of the economic, voting and control rights in an investment trust structure, clarity on open offer triggers vis-à-vis change in unitholding and/or change of shareholding of the manager beyond specified thresholds is required. REITs would also require specific guidance on how to execute open offers, depending on takeover triggers.
  • Aligning regulatory requirements prescribed for listed companies and listed REITs, in the form of doing away with the 15% perpetual sponsor lock-in requirement and permitting inter-se transfers of Units locked in for three-years are sure to be on the anvil. Similarly, while the REIT Regulations provide for re-designation of Sponsors in case of transfer of Sponsor unitholding above prescribed thresholds, no guidance is provided on the steps to be undertaken in this regard such as relinquishing of rights in the Manager etc. Guidance on categorising sponsors as public and vice-versa as provided in respect of listed companies may be prescribed.
  • The present regulatory framework offers limited guidance on disclosures required by REITs on a continuous basis. Given their unique holding and management structures, REITs (and their Unitholders) would benefit from nuanced guidance in this regard – be it guidance on the relevant triggers for disclosures or clarity on interpretative challenges associated with applying regulations designed for listed companies to REIT structures. In the same vein, amendments could be considered to rationalise disclosure requirements prescribed for REITs (in line with disclosures for listed companies) based on materiality and nexus with the REIT. For instance, the present regulatory framework requires specific disclosures and confirmations to be provided by associates of the REIT, its sponsors and manager. With the scope of the term ‘associates’ being fairly wide, REITs are presently required to provide disclosures in respect of a large number of entities which have no connection with the REIT, its assets or business activities.
  • Keeping in mind the specificities of the REIT management structures, specific guidance may be provided on instituting Unit based employee incentive schemes for the employees of the Manager and the Asset SPVs.
  • Along the heels of guidelines issued for preferential issues, institutional placements and rights issues by REITs, existing and future REITs would also require clarity on guidelines for redemption and buyback of REIT units; and delisting and winding up of REITs.

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Photo of Arjun Lall Arjun Lall

Partner (Head – South) at the Bangalore office of Cyril Amarchand Mangaldas. Arjun specializes in capital markets, M&A and private equity. He has advised on several landmark pioneering and ‘first of its kind’ capital markets transactions in India over the last eighteen years…

Partner (Head – South) at the Bangalore office of Cyril Amarchand Mangaldas. Arjun specializes in capital markets, M&A and private equity. He has advised on several landmark pioneering and ‘first of its kind’ capital markets transactions in India over the last eighteen years, including on the establishment and listing of the first REIT. He has been consistently ranked in legal publications as one of the leading capital market lawyers in the country. He can be reached at arjun.lall@cyrilshroff.com.

Photo of Janhavi Manohar Janhavi Manohar

Principal Associate in the Capital Markets practice at the Bangalore office of Cyril Amarchand Mangaldas. Janhavi has advised clients across a wide range of sectors on public offerings of securities, including IPOs, India’s first REIT, qualified institutions placements and debt issuances. She has…

Principal Associate in the Capital Markets practice at the Bangalore office of Cyril Amarchand Mangaldas. Janhavi has advised clients across a wide range of sectors on public offerings of securities, including IPOs, India’s first REIT, qualified institutions placements and debt issuances. She has also advised clients on private equity investments. She can be reached at janhavi.manohar@cyrilshroff.com

Photo of Rohit Tiwari Rohit Tiwari

Principal Associate in the Capital Markets practice at the Bangalore office of Cyril Amarchand Mangaldas. Rohit has advised clients across a wide range of sectors on public offerings of securities, including IPOs, REITs, qualified institutions placements and bond issuances. He has also contributed…

Principal Associate in the Capital Markets practice at the Bangalore office of Cyril Amarchand Mangaldas. Rohit has advised clients across a wide range of sectors on public offerings of securities, including IPOs, REITs, qualified institutions placements and bond issuances. He has also contributed to the firm’s publications on private equity, corporate governance and REITs. He can be reached at rohit.tiwari@cyrilshroff.com