Insights
SEBI amends InviTs and REITs regulations
April 1, 2019SEBI has notified the Real Estate Investment Trusts (Amendment) Regulations 2019 and Infrastructure Investment Trusts (Amendment) Regulations 2019 to reduce the minimum subscription requirement and define the trading lot in terms of number of units of Real Estate Investment Trusts (ReITs) and Infrastructure Investment Trusts (InvITs). It has also released guidelines on the manner of determining the minimum allotment and trading lot size for both these regulations and enhanced financial disclosures InvITs. These amendments are effective from 22 April 2019.
The minimum subscription from any investor in an initial and follow-on offer is Rs.50,000 for units of a Real Estate Investment Trust (ReIT) (earlier Rs. Two lakhs) and Rs 1 lakh for units of an InvIT (earlier Rs. Ten lakhs). The trading lot for both is 100 units. Allotment shall be made in multiples of a lot.
The amended InvIT Regulations also provide for the following important amendments :
- A framework for private placement of units of InvITs which are not listed under a new Chapter VIA. This includes, amongst others, provisions related to applicability of the framework, manner and procedure for raising of funds and investments, disclosures, surrender of certificate and listing of such units.
- The limits for aggregate consolidated borrowings and deferred payments net of cash and cash equivalents, have been increased to 70% of the value of the InvIT assets (earlier 49%) under regulation 20(2). If the aggregate consolidated borrowings and deferred payments of the InvIT, holdco and the SPV(s), net of cash and cash equivalents, exceed 25% of the value of the InvIT assets, for any further borrowing:
- upto forty nine percent, an InvIT shall – (i) obtain credit rating from a credit rating agency registered with the Board; and (ii) seek approval of unitholders in the manner specified in Regulation 22.
- above forty nine percent, an InvIT shall – (i) obtain a credit rating of “AAA” or equivalent for its consolidated borrowing and the proposed borrowing from a credit rating agency registered with the Board; (ii) utilize the funds only for acquisition or development of infrastructure projects; (iii) have a track record of atleast six distributions, in terms of sub-regulation (6) of regulation 18, on a continuous basis, post listing, in the years preceding the financial year in which the enhanced borrowings are proposed to be made; (iv) obtain the approval of unitholders in the manner specified in sub-regulation (5A) of regulation 22. [ Reg.20(3) (a) and (b) substituted]. Where the consolidated borrowings and deferred payments of the InvIT exceed 49 % as above, the following requirements must be fulfilled:
- approval from 75% of the unit holders by value shall be obtained [sub-regulation (5A) of regulation 22 inserted]
- InvITs shall submit a quarterly report to the designated stock exchange within thirty days from the end of every quarter ending June and December. [proviso to regulation 23(4 inserted]
- the valuation of the assets of the InvIT shall be conducted by the valuer for quarter ending June, September and December, for incorporating any key changes in the previous quarter and such quarterly report shall be prepared within one month from the date of the end of such quarter. [Proviso to regulation 21(5) inserted]
- In relation to delisting of units of InviITs, Reg.17(1)(e) has been amended and clause (ea) inserted, to provide that the investment manager shall apply for delisting of units of the InvIT to the Board and the designated stock exchanges if :
(e) the Trustee or investment manager (and not the Sponsor) requests such delisting and such request has been approved by unit holders in accordance with regulation 22 ; and
(ea) the Trustee or Investment Manager of a privately placed and listed InvIT chooses to convert InvIT to a privately placed unlisted InvIT and such request has been approved by unit holders in accordance with regulation 22 . Provided that exit shall be provided to dissenting unitholders.
In case of (ea) above, approval from not less than 90% of the unit holders by value shall be required and exit shall be provided to dissenting unitholders.[sub-regulation (5B) of regulation 22 inserted]. The InvIT may, in such case, retain its certificate of registration and continue to undertake the activity of a privately placed unlisted InvIT.
SAM & Co comment
The increase in the leverage limit from 49% of the value of InvIT assets to 70% of the InvIT assets is a positive for the InvIT industry, as it will allow investment managers to utilize additional borrowings for financing acquisitions or develop new infrastructure assets, as opposed to the expensive and time-consuming process of raising fresh capital from existing or new unitholders each time a new acquisition is identified. However, the amendments to the SEBI InvIT Regulations come with certain conditions, including the requirement for the InvIT to obtain a credit rating of ‘AAA’ or equivalent for increasing the leverage limit beyond 49%. For InvITs opting for leverage levels above 49% of the value of InvIT assets, stability of cash flows will become very critical and will be a crucial component for achieving the ‘AAA’ benchmark.
The regime for unlisted private InvITs seems to be SEBI’s response to the industry’s clamour for providing more flexibility in private InvIT structures. While private unlisted InvITs do allow more flexibility vis-à-vis private listed InvITs, especially with respect to minimum number of investors and the leverage limit, however, the lack of clarity on the tax benefits associated with private unlisted InvITs may make such unlisted InvIT structures unattractive for investors till the time the Government provides clarity over the tax benefits for unlisted InvITs.
