The Securities and Exchange Board of India (SEBI) issued a circular in April this year (Circular), reducing timelines for REIT listings from 12 working days to six working days from the date of public issue closure. While this is a welcome move from the perspective of public investors and is yet another step towards ensuring parity between REIT and listco regimes, this could prove challenging for REITs and their advisors, given the intricacies of the REIT regulatory framework.
The post issue period (i.e the period between closure of the issue and listing) is chockfull even for companies undertaking IPOs, requiring careful coordination among the issuer company, its advisors and other intermediaries appointed for this purpose. This period typically involves a number of synchronised actions, including scrutiny of applications, blocking, unblocking and refund of application amounts, finalisation of allotment details, coordination with stock exchanges for listing and trading approvals and a host of other steps undertaken by the issuer company, in tandem with its advisors.
While this is an exacting process to begin with for any issuer, REIT listings bring with them the added complexities of formation transactions (i.e. the transactions through which a REIT acquires its portfolio of assets), which are required to be closed during this period. Thus, in addition to the customary listing actions, REITs will also need to complete complex acquisitions during this period, making the shortened timeline appear all the more daunting.
Post issue activities – A REIT perspective
Owing to time, cost and other commercial considerations, swapping shares of the asset SPVs for REIT Units has emerged as the most preferred and efficient option for effecting formation transactions. Given the various regulatory and commercial considerations, including investor expectations, REITs are typically expected to complete all of their formation transactions prior to allotment of Units in the IPO. However, the regulatory framework restricts REITs from undertaking any issuance of Units prior to its IPO. To address this quandary, the regulator has introduced a limited exception, permitting issuance of Units post the issue closure date (prior to allotment in the IPO), solely for the purpose of facilitating timely closure of formation transactions. The REIT Regulations read with the Circular effectively provide parties with three working days (as against nine working days available previously) to complete the entire gamut of steps required to close the formation transactions (as well as the routine steps required to complete the allotment in the IPO).
As market participants are well aware, sectoral sensitivities, coupled with regulatory considerations often result in formation transactions (including those effected through swaps), involving several complicated, sequential restructuring steps. Investments in the asset SPVs could be through a combination of equity, debt, or other hybrid instruments, with each instrument requiring its own nuanced treatment vis-à-vis a transfer to the REIT. Further, such formation transactions could involve a large number of intervening steps as individual assets may be housed in separate SPVs, requiring different corporate actions to be taken for different assets, depending on the mode of transfer. While some of these steps may be undertaken well in advance, parties to the formation transactions often prefer to initiate and effect such steps much closer to the listing date, once there is greater certainty of the transaction. Given the sequential nature of these steps, parties will need to factor in the time taken for each step/ corporate action to be reflected in the depository system before effecting the next step/ corporate action.
Further, such transactions often involve third parties/ joint venture partners, not forming part of the sponsor group, whose readiness will be critical for the closure of the transactions. Closure of such transactions are also contingent upon the cooperation of various third parties and intermediaries. For instance, it is not uncommon for portfolio assets, or the shares of the asset SPVs to be encumbered in favour of third-party lenders. With lenders having specific requirements with respect to the timing of the release of security; the coordinated efforts of the lenders, management teams and depositories become crucial in ensuring timely closure of the transaction.
REIT IPOs, comprising an offer for sale, pose an additional layer of complexity as parties will also have to factor in additional steps required to place the sale Units in escrow to facilitate their smooth transfer to allottees in the IPO. Relevant teams will also need to pay attention to various closing and post closing actions required to complete the acquisitions, including regulatory intimations, adoption of amended charter documents, etc., all of which are required to be completed in a time bound manner.
It is important to bear in mind that this flurry of activity plays out against the backdrop of a change in management of the REIT portfolio – with the management responsibilities being handed over by the Sponsors/ other third parties to the REIT Manager. As such, a significant amount of management time and attention will be focussed on ensuring a smooth transition to the REIT regime. In addition, as is the case with any other entity accessing the capital markets for the first time, management teams are likely to be treading into unfamiliar territory as they transition from a private to a listed landscape, navigating the myriad IPO and stock exchange related agreements and documentation. Being a watershed moment for the portfolio, management time is also expected to be taken up in regulatory or public/ investor interactions. Timely closure of the formation transactions therefore adds to the wide-ranging issues vying for management time and attention during this period.
Calibrating for a strong finish
In anticipation of the various workstreams that will need to be attended to during the post issue period, it will be imperative for the working group to plan ahead in this regard. Transaction advisors will have an important role in guiding the REIT through this process and orchestrate the various moving pieces.
Advisors and management teams will be required to come up with a detailed step plan to fit the commercial objectives of the sponsors within the regulatorily mandated timeframe. With each transaction structure being unique, the step plan will need to be tailor made for each transaction. The various steps to closing will need to be pre-empted, processed, and broken down to the minutiae right at the initial stages of the transaction. Advisors will be required to carefully assess each step and evaluate the viability of completing the steps within the envisaged timelines and offer creative solutions to simplify/ advance specific steps where possible and also draw up back-up plans for critical items where possible. Roles and responsibilities for the various actions will need to be clearly assigned, with each person apprised of their role well in advance. Where advisors anticipate third party/ external dependencies, they would be required to pro-actively engage with such persons to ensure that they remain coordinated and cognizant of their role in the process. Advisors will need to closely monitor and track the progress of each step and sub-step on a real time basis and be quick to identify and fix any roadblocks. Sponsor and Manager teams may also be required to examine their internal teams and augment their workforce, if required, to be able to deftly juggle multiple workstreams at this stage. Given the complexity of the process and the involvement of a multitude of stakeholders, advisors helming the post issue process will be required to lead effectively and decisively to ensure a strong finish.