Representation for retail investors in REITs, INVITs gets Sebi nod

Presently, SEBI Regulations mandate the Sponsor to hold a minimum of 15 percent units for a period of at least three years from the date of listing of units.

The Securities and Exchange Board of India (SEBI) on June 28 approved a provision that ensures opinions of retail unitholders are fairly represented in the decisions taken by Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs).

The Board of Sebi said it has approved amendments to the Sebi (Infrastructure Investment Trusts) Regulations, 2014 and Sebi (Real Estate Investment Trusts) Regulations, 2014 to provide nomination rights to unitholders holding 10 percent or more of the total outstanding units of the InvIT/REIT, either individually or collectively, on the board of directors of the Investment Manager/Manager.

“Further, the principles of Stewardship Code shall be applicable for all unit holders holding ten percent or more of the total outstanding units of the InvIT/ REIT,” SEBI said in a release.

The current regulatory framework for InvITs and REITs does not explicitly provide for unitholders to have a say in the decisions made by the Investment Managers. However, big investors often have a say in investment decisions by nominating a director on the Board of the Investment Manager.

Makarand Joshi, founding partner, MMJC and Associates – a corporate compliance firm, said the proposal seems to be balancing proposition in such a way that at one hand they are given powers to participate in decision making but parallelly on other hand they are also held accountable.

"Unitholders of InvIT have power to nominate Director on Board of Investment Manager. This is a big power; however, requirement of adopting Stewardship Code is beginning of casting fiduciary responsibility on investors! Generally, Director holds fiduciary position and not investors," said Joshi.

Besides, the Sebi also tweaked skin in the game rules for sponsors of InvIT and REITs, making them more stringent.

“In order to ensure continued alignment of interests during the life of the investment vehicle, the Board has approved that Sponsor of InvIT/REIT be required to hold a certain minimum unitholding on a reducing scale for the entire life of the InvIT/ REIT,” it said in the release. “Further, the mandatory minimum unitholding shall be locked-in and be unencumbered.”

Presently, Sebi Regulations mandate the Sponsor to hold a minimum of 15 percent units for a period of at least three years from the date of listing of units.

The Board also approved the proposal for introduction of self-sponsored Investment Manager/ Manager i.e. an Investment Manager/ Manager who also takes on the responsibilities of the Sponsor of InvIT/ REIT. This has been done to create an opportunity for mature and independent, professionally managed Investment Managers to emerge, and to provide an additional exit option for the Sponsor of InvIT/ REIT.

Some of the key conditions for conversion of Investment Manager/Manager to self-sponsored Investment Manager/Manager include minimum five years of listing, at least one of the sponsors proposing to disassociate to have been a sponsor of the InvIT/REIT for a minimum period of five years, and the existing sponsor or their associates to not own or control the Investment Manager, among others.