SEBI wants to bolt the exit door for REITs/InvITs' sponsors

The underlying assets of REITs/InvITs are long-term assets and require active management.

The Securities and Exchange Board of India (SEBI) has proposed that a sponsor of a Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvIT) should hold a certain percentage of the total unit capital in the vehicle "at all points in time".

Adding to the burden of the sponsor(s), the said holding cannot be encumbered or pledged.

Thankfully, the market regulator has proposed that the mandated holding can keep going down with the passage of time. The graded holding of the total capital during different periods has been presented in the accompanying illustration.

The market regulator has also proposed to review the norms for declassification. A sponsor(s) of a REIT/InvIT whose units have been listed on the stock exchange(s) for a period of three years is permitted to declassify as the sponsor provided, among other conditions, that there shall be a newly inducted sponsor in place of the existing sponsor declassifying, and the outgoing Sponsor(s) and its associates shall not have any equity shares or interest or control in the manager/investment manager of the REIT/InvIT.

A deeper look

A REIT company runs a portfolio of premium real estate assets and mortgages, and these assets, in turn, deliver returns to the REIT. For instance, REITs invest in reputable commercial real estate projects and draw rent and lease income. The same logic governs the operations in InvITs, that is, these vehicles also pool money from a number of investors but instead of channelling them into real estate assets, the funds are funnelled into infrastructure assets for returns.

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The sponsor of a REIT or an InvIT is responsible for setting up the REIT/InvIT. The role of the sponsor in this context can't be emphasised enough considering that the REIT or InvIT are allowed to register only if the eligibility conditions are fulfilled by the sponsor.

In the case of a REIT, a sponsor is any person(s) who set(s) up the REIT and is designated as such at the time of application whereas, in the case of InvITs, a sponsor is any company or LLP or body corporate which sets up the InvIT.

The sponsor company monetises its assets by transferring its real estate assets or infrastructure projects in the REIT/InvIT and funds are raised from public or by private placement for such acquisition and the listed units are offered to the unit holders. The underlying assets of REITs/InvITs are long-term assets and require active management. Decisions regarding the management of the assets keep impacting the unit holders and their return on their investment.

As of date, there are five REITs and 19 InvITs registered with SEBI, of which three REITs and 15 InvITs have raised funds through initial offers and/or further offers.

SEBI, in the consultation paper, contends that there is a need to have at least one sponsor throughout the life of the REIT/InvIT given that this particular segment of the market is "in a nascent stage and continuously evolving."

"It is considered that the sponsor needs to hold a certain percentage of units on a perpetual basis in order to ensure that there is an alignment of interest between the Sponsor and the unitholder and taking into account the fact that the assets of the REIT/InvIT are leveraged and are of long term nature." the regulator argues in the consultation paper.

The regulator also states that allowing a sponsor to dilute its unit holding completely immediately after the mandatory 3-year lock-in period would be "inappropriate" in view of the impending debt obligations "much of which would have been contracted by the sponsor before transferring the assets into the REIT/InvIT."

"Thus, the need for ensuring alignment of interest between the sponsor and unitholders becomes necessary in the case of REIT/InvIT," the market watchdog said.