Mumbai, September 18, 2017

Regulator also allows a REIT to lend to the underlying holding company or special purpose vehicle

Capital market regulator Securities and Exchange Board of India (Sebi) on Monday allowed infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) raise capital by issuing debt securities. The Sebi board, at its meeting on Monday, also made several other relaxations to the InvIT and REIT framework to give a boost to the stalled infrastructure projects in the country.

InvITs and REITs are investment vehicles that allow investors take exposure to an income-generating infrastructure project or real estate property. Prior to this development, the framework only allowed launch of equity-oriented REITs and InVITs, which offer only indicative yields, not fixed yields. Issue of debt-oriented REITs and InVITs will offer a fixed-return to investors, which could give a fillip to these instruments, said bankers.

Further, Sebi has extended the concept of 'strategic investor' for REIT. Currently, it was only allowed for InVITs, which has seen two issues in the domestic market. It also allowed single-asset REIT on the lines of InVIT. It also allowed a REIT to lend to the underlying holding company (Hodco) or special purpose vehicle (SPV).

"Further, the board, after deliberations, decided to have further consultations with the stakeholders on a proposal of allowing REITs to invest at least 50 per cent of the equity share capital or interest in the underlying Holdco/SPVs. Similarly, allowing Holdco to invest with at least 50 per cent of the equity share capital or interest in the underlying SPVs," said Sebi in a release.

"The proposal of permitting a single asset, should enable owners of large-value assets to explore REITs. Further, allowing REITs to lend to holding companies and SPVs, should result in efficient fund flow management. Through these proposals, the Sebi has reiterated its intent to adopt a consultative approach in refining the regulations to make these trusts successful platforms in India."said Bhairav Dalal, partner, real estate (tax), PwC India.

Sebi had notified the regulations for REITs and InvITs in 2014. However, fund raising through these instruments has failed to take off.

So far, only two InvITs -- IRB InvIT Fund and Indiagrid Trust -- have been listed on the stock exchanges. While several realty players have shown interest in launching a REIT, there hasn't been a single issuance under this route.

The regulator has also proposed to amend definition of valuer for both the trusts. Currently, the valuer should not be an investor in InvITs or the assets being valued. The valuer should have minimum experience five years in undertaking valuation of the infrastructure assets. However, the press release could not ascertain the proposed changes in the definition.

"The changes approved by Sebi is yet another attempt to push the REIT and InvIT regime, which till date has practically been a non-starter despite the regime being notified several years back (with an exception of just a few such vehicles being set-up). Allowing such vehicles to raise debt capital by way of issuance of bonds is unique for a Sebi fund regulatory vehicle as its not permitted for other Sebi regulated fund vehicles like alternative investment funds (AIFs) and mutual funds. This brings the investment trust regime more at par with the RBI's NBFC regime which typically raises private capital by issuance of NCDs," said Tejesh Chitlangi, partner, IC Legal.

Besides, the market regulator has apprised the board on the action taken against the 331 suspected shell companies which were barred to trade since August 7, said a source in know. So far, the regulator has asked for a forensic audit of about 12 firms. While stock exchanges are looking into the credentials of about 90 firms, in some cases, the Securities Appellate Tribunal (SAT) had put a stay order on the trading ban.

Sebi has learnt to have also reviewed the cases that are pending before various courts and appellate tribunals. The regulator had given on a one-year timeline to conclude cases more than a year old. To fast-track the matter, Sebi Chairman Ajay Tyagi has also strengthened the enforcement department and appointed internal people but the department is still finding it difficult to meet the deadline. In a first, Sebi has also appointed a chief economic adviser who may assist the regulator on various policy issues.

[The Business Standard]