Sebi proposes special rights to certain unitholders of REITs and InVITs

Unitholders of REITs and InvITs may appoint a nominee or a council member for every ten percent of their holding, according to the Sebi proposal

The market regulator has proposed special rights to certain unitholders of Real Estate Investment Trust (REIT) and Infrastructure Investment Trusts (Trusts), in a consultation paper released on May 16.

Under the current regulations, no unitholder of these trusts can enjoy superior voting rights. But certain REITs and InvITs allow investors who own a certain percentage of units to nominate directors on the board of the manager/investment manager of these trusts.

REITs and InvITs are initiated and set up by sponsors, managed by investment managers, and have trustees who ensure that the unitholders’ interests are taken care of.

While these trusts aren’t meant to give special privileges to any category of unitholders, they do so—through offer documents or placement memorandum-- to inspire confidence among large institutional investors or investors with a significant minority interest. Recognising this practical necessity, the Securities and Exchange Board of India (Sebi) has suggested that such privileges should not be restricted to large institutional investors but should be open to other investors as well. Therefore, they have invited comments on whether special rights such as the right to nominate directors on the Board of Manager/Investment Manager of REIT/InvIT should be allowed and, if yes, what should be a percentage of units should the investors hold to have a say in the constitution of the board or in the running of the trusts.

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They came up with two options—one, investors be allowed to nominate directors on the board of the manager/investment manager for every ten percent of the units they own; or two, investors be allowed to nominate a member into the Unitholders Council for every ten percent of the units they own.

Investors who collectively hold a minimum of 10 percent may also come together to avail these privileges, of either nominating a director on the board or a member on the Council.

Why the second option?

The first option may result in the investment manager having too large boards, according to the paper. This is because the REITs and InvIT regulations require that at least half of the board be made up of independent directors. So, if each unitholder that has ten percent holding exercises their right, their nominees add up to 10 directors, and to that will need to be added another 10 independent directors—in total, the board will have 20 directors.

“A very large board may lead to an inability for directors to have their voices heard; the risk of lack of engagement by all the directors; difficulty in having good dialogues/discussions at a board meeting, and the risk of becoming ineffective and bureaucratic,” stated the Sebi paper.

Therefore, the second alternative of a Unitholders Council has been proposed.

Every member of the council will have one vote for every 10 percent of the holding represented by him/her. Decisions will be taken by the simple majority of council members present. For example, if there are three members present, representing 2 (20 percent holding), 3 (30 percent), and 2 (20 percent) votes respectively, a matter will be decided on at least four votes.

Any matter that has to be decided by the board of the investment manager will be first decided by the board; if approved, then presented before the council; and if it is not approved by the council, it will be put to vote at the unitholders’ meeting along with the recommendations made by the board and the council. For anything to be presented at the unitholders’ meeting, it has to be given the go-ahead by the board and the council.

The unitholder council will be considered an insider for the purpose of SEBI (Prohibition of Insider Trading) Regulation 2015. The council members will also be responsible for ensuring that the decisions of the council are in line with REIT and InvIT regulations.