Securities and Exchange Board of India (SEBI) on January 10 issued another consultation paper on additional proposals regarding the framework for issuance of subordinate units of REITs and InvITs. The first consultation paper on the issue was floated last month.
“The objective of this consultation paper is to seek comments from the public on the following additional proposals: (a) Specification of a ceiling on the extent of subordinate units that can be issued; (b) Bringing uniformity in the nature of rights conferred on subordinate units; © Dealing with changes in terms and conditions of the subordinate units post issuance,” SEBI said.
The creation of and the issuance of subordinate units is primarily intended to bridge the valuation gaps that may arise as a result of difference in the valuation of an asset perceived by the Sponsor and investors/unitholder. Typically, SEBI said, these valuation gaps will not be too wide or broad and hence the proposal to specify an upper ceiling up to which subordinate units can be issued.
Thus, the market regulator has proposed that the amount of subordinate units that can be issued at the time of acquisition of an asset shall not exceed 10 percent of the acquisition price of the asset. Further, at any point of time, the total number of outstanding subordinate units shall not exceed 10 percent of the total number of outstanding ordinary units.
The subordinate units are proposed to have inferior rights. Thus SEBI has also sought comments on whether subordinate units shall only carry inferior voting rights or inferior distribution rights or both and whether inferior rights on all subordinate units issued by a REIT/ InvIT shall be similar i.e. there shall not be multiple classes of subordinate units. This proposal seeks to eliminate the possibility of a confusing maze of subordinate units with different rights.
“If there is a uniformity across the industry about the extent of inferior rights offered on the subordinate units, it will aid in easier understanding of subordinate units for investors, and easier comparison of unitholding acrossREITs and InvITs.” SEBi said.
SEBI has also sought comments on whether the rights of subordinate units be uniform throughout the industry or whether each REIT or InvIT can have their own kind of subordinate units.
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