Sebi rejigs norms for companies to raise funds via REIT, InvIT

Market regulator Securities And Exchange Board Of India has tweaked the norms for companies to raise funds via Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvIT). Firstly, the number of sponsors for REIT can now go up to 5 from the previous 2.This will be very beneficial for the industry as everyone prefers to cut down risks, says Rajeev Talwar, Group Executive Director, DLF.The Sebi also introduced a two layered structure where REITs will be able to invest in a holding company that has SPVs for real estate project. So after the change, a company need not go for any restructuring before opting for REIT, says Maadhav Poddar, Director – Tax and Regulatory Services, EY. Hospitals & hotels are now considered real estate and have been brought under REIT. Also, 20 percent of the REIT money can now be used for under construction projects compared to 10 percent earlier. This is a big positive, as infrastructure companies have most of their projects under construction and ther isn't any inventory of finished projects, says Talwar.These tweaks will be extremely investor friendly, says Jaynt Mhaiskar, MEP Infrastructure. He adds that money that can be raised via invit will increase significantly now.With the easing of norms, a direct market access will be given to FPIs in the debt market. Earlier foreign investors had to go through Indian brokers.Since FPIs can directly invest without intervention of Indian brokers, the cost of business will decrease and FPIs will be more interested to get into the direct market, says RS Loona, Partner, DV Alliance.Below is the verbatim transcript of Jayant Mhaiskar and Rajeev Talwar’s interview to Surabhi Upadhyay, Sumaira Abidi and Kritika Saxena on CNBC-TV18. Sumaira: We understand that your proposal for the infrastructure investment trust (InvIT) has been approved by Sebi. What are your first thoughts and can you also tell us what are the modalities now? Mhaiskar: MEP Infrastructure has received the in-principle approval from the regulator a few days back. We are in the process of filing the Draft Red Herring Prospectus (DRHP) as we had discussed the last time. I believe there was a meeting which has been concluded sometime back is what I also understand. We are awaiting the outcome of that meeting but the prima facie use is it is going to be very investor friendly and also something which will help the InvIT to go forward and close the transaction at the earliest. Surabhi: We don’t have the specific details of the fresh bout of ease that the regulator is now trying to bring into InvITs and to Real Estate Investment Trust (REITs) but one of the issues in respect to InvIT specifically was that the earlier regulation didn’t allow an InvIT to invest in dual special purpose vehicle (SPV) structures. So you had an SPV but that SPV could not go and further invest into other SPV. Was that a big impairment and from MEP Infrastructure’s point of view how soon can you look at a listing, what sort of investors are you hoping to get on board, what sort of assets are going to come in this trust? Mhaiskar: As far as our particular InvIT is concerned, as I said, we are in the final phases of finalising our DRHP and we should be able to file that at the earliest. Currently the assets to be pooled under the InvIT would be depending on I believe an outcome where I understand that REIT has also likely to be considered about InvIT funds being able to fund into the I would say under construction projects. If it happens, it will be a very big thumbs up to particular InvIT company, for MEP as MEP already has fixed hybrid annuity projects under its guard where the money potentially which the company can raise through InvIT can be infused to take care of the InvIT along with the preferential/rights issue which the company’s board has already approved. Surabhi: We have been discussing REITs for over seven to eight years now. Talwar Yes but they were allowed only two and a half years ago. When this government came in, in their first Budget they allowed it, they tweaked the rules in the second Budget, third one gave us the dividend distribution tax (DDT), and now the rules are coming in. I think they are falling into place now. Surabhi: The government has been trying to do everything possible to remove hurdles including taking away the DDT issue. Now we have Sebi coming out, broadening the number of sponsors from two to three as my colleague Kritika just pointed out and allowing 20 percent under construction. When do we see a REIT listing, when is DLF going in for a REIT listing? Talwar: I think what you will see is in the coming – there are still of course regulatory issues that we will have to take regular permissions but I think we have announced it already that, yes, the first step which is disinvestment into an existing entity which has leased and completed assets, is already going on, that process, and non-disclosure agreements were signed last year. These are very large transactions therefore all the investors from abroad and in India are looking at them. They have now reduced and I think that was the last analyst call that the number of people who are actually doing due diligence on a very serious level has come down to single digits and from there further on the valuations done by them would lead to the first investment. Before of course announcing it one would have to seek approvals from various authorities and I think within the regulators, the government of India, the RBI, the Sebi and others who are concerned with it, I think it is only after that that one will have to reveal the first name and then of course the amount. So, we are well under process and we are well on our way and I am sure we are not the only ones, there are large number of other players who have completed and leased assets who are also going in for REIT. Kritika: There was some confusion and just a clarification on the point, there was some confusion about exactly how many sponsors can go up to REIT. What had been asked by the industry was for it to be increased from two to three and I believe five is the amount. Does that make the case stronger for players to go for REITs? Talwar: Division of risk is something which is practiced all over the world and I am sure this is what is in that, that yes larger number of people come in, smaller risk but didn’t spread it along various companies and various developers, various geographies. So, I think in all, as the government discovers the route, more and more changes will come in and I am sure India is well known that India does do reforms very well in fact the biggest, the GST has come in already. I think the government has done a fabulous job on financial reforms and to that extent the finance minister has been extraordinary.