Sebi board clears final guidelines for realty, infrastructure trusts

New Delhi, Aug 10 : To help attract greater foreign and domestic investments into real estate and infrastructure, markets regulator Sebi today cleared final guidelines for creation and listing of business trusts for these key sectors. The norms were cleared by Sebi’s board at a meeting, which was also addressed by Finance Minister Arun Jaitley, and takes forward the government’s proposals in this regard as outlined in the Union Budget presented last month.

Talking to reporters after the meeting, Sebi Chairman U K Sinha said that the proposals with respect to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) were cleared by the board. The other proposal cleared by the board was about a simplified one-time procedure for registration of brokers. Jaitley had said in his budget speech last month that “REITs have been successfully used as instruments for pooling of investment in several countries” and necessary tax incentives would be given for these products, as also for InvITs.

“These structures would reduce the pressure on the banking system while also making available fresh equity. I am confident these two instruments would attract long term finance from foreign and domestic sources including the NRIs,” Jaitley had said. Infrastructure and construction sectors have a significant role in the economy and the government feels that growth in these sectors is necessary to revive the economy and generate jobs.

Along with foreign investors, domestic institutions like insurers, pension funds and provident funds would also be allowed to invest in these trusts. Through InvITs, the government is aiming to create a new avenue for raising funds to meet infrastructure investment requirements to the tune of Rs 65 lakh crore for the 12th Five Year Plan (2012-17). The new norms would enable listing and trading of REITs and InvITs as any other security on the stock exchange platforms and also help create new platforms for raising of funds by real estate and infrastructure companies, respectively.

Despite significant tax benefits for the sponsors of these business trusts, these new regulations would also be “revenue accretive” for the government in form of taxes. The new norms would help in channelising domestic investments into real estate and infrastructure sectors, and also help attract foreign capital for these fund-starved segments of the economy. Certain changes or amendments and additional guidelines would be required the government and other regulators for development of REITs and InvITs in India.

These include allowing foreign investment into the units of REITs and InvITs at the time of IPO and for acquisition from secondary markets, and for allowing insurance companies, pension funds and provident funds to invest. Sebi would take up the relevant issues with the concerned regulator or the government department for necessary action. The draft guidelines for REITs and InvITs were earlier put in public domain for comments by all stakeholders and the final norms have been prepared after incorporating them.

Among others, comments were received from 65 entities, running into over 450 pages, for REIT guidelines. For InvITs, comments were received from the Finance Ministry, companies, merchant bankers and asset management companies. Sebi has agreed to industry demand for reducing the minimum asset size for REITs from Rs 1,000 crore to Rs 500 crore, while it has also decided to allow multiple sponsors. However, the regulator has decided against reducing the requirement of mandatory continuous holding by sponsors to ensure alignment of their interest with that of the Trust.

The minimum initial offer size would be Rs 250 crore with a minimum public float of 25 per cent. The sponsors would need to have mandatory holding of 25 per cent of REIT units for three years and continuous holding of 15 per cent thereafter. Multiple sponsors would be allowed to hold the mandatory holding together. On whether retail investors would be allowed to invest, Sebi feels that the market is still in a nascent stage and therefore it is necessary to keep the minimum investment thresholds at relatively higher levels.

The new norms would also ensure that excessive leverage is not undertaken through REITs, while the Trustees would be required to be independent and not an associate of the sponsor or the manager of the Trust. The minimum networth of the manager would be increased to Rs 10 crore, from Rs 5 crore proposed in draft guidelines.For InvITs also, Trustees would need to be independent and not an associate of sponsors or the managers.

For InvITs proposing to invest in PPP projects, where a regulatory requirement or concession agreement requires the sponsor to hold a certain minimum per cent of the Special Purpose Vehicle, the sponsor holding norms have been relaxed. The minimum networth requirement of an InvIT sponsor would be Rs 100 crore, as against Rs 10 crore proposed in draft guidelines. The networth of investment manager has also been raised from Rs 5 crore to Rs 10 crore. The minimum investment size for InvITs would remain at Rs 10 lakh. The minimum requirement of two assets for publicly offered InvITs has been done away with, but the industry demand has been rejected for allowing such trusts to invest in holding company of the SPVs.

The majority directors of the Investment Manager would need to be independent, while it would not be required to have credit rating for non-PPP projects. The associates of trustee would not be allowed to invest in the units of InvITs to avoid conflict of interest.