Particulars

Existing Provisions

Proposed amendments in provisions

Impact of proposed changes

Permitting transfer of locked-in units amongst sponsor and sponsor group for REITs and InvITs

Regulation 11(3) of the SEBI REIT Regulations and 12(3) and 12(3A) of the SEBI InvIT Regulations specify the minimum unitholding requirement applicable to sponsor(s) and sponsor group(s).

Further, Regulation 11(3A) of the SEBI REIT Regulations and Regulation 12(5) of the SEBI InvIT Regulations provide that units required to be held in terms of the abovementioned regulations shall be locked in and not be encumbered.

Units held by Sponsors and Sponsor Groups under REIT and InvIT Regulations may be transferred within the sponsor group entities, provided the lock-in period continues with the transferee, who cannot transfer the units until the lock-in period ends.

For REITs/ InvITs with multiple sponsors, to prevent name-lending and mis-selling, locked-in units can only be transferred within such sponsor and their own sponsor group entities, not to other sponsors or their groups.

To align with the flexibility granted to promoters of listed companies under SEBI’s ICDR Regulations, 2018, it is proposed that similar provisions be extended to sponsors of REITs and InvITs. This would enable sponsors and sponsor groups of REITs and InvITs to transfer units within their respective sponsor and sponsor group entities.

Definition of Common Infrastructure under REIT Regulations

"Common infrastructure" is not defined under the SEBI REIT Regulations as of now.

It is now proposed to include the definition of ‘Common Infrastructure’ as follows:

“Common infrastructure” shall include the facilities or amenities such as power plants, district/retail heating and cooling systems, water treatment /processing plants and waste treatment/ processing plants which exclusively supply or cater to, or are exclusively consumed by, the REIT, its HoldCo(s) or SPV(s), irrespective of whether such facilities or amenities are co-located or not within any single project, by nature of their requirements and specifications.

Provided that in the case of power plants, any excess power not consumed by the REIT, its HoldCo(s) or SPV(s) may be supplied to state utility/grid Page 15 of 65 in accordance with the relevant central and state regulations and the credits or payments received are applied towards the REIT, its HoldCo(s) or SPV(s).

Provided further that in case of other facilities or amenities, any excess or surplus capacity/production/units not consumed by the REIT, its HoldCo(s) or SPV(s) may be utilized outside the REIT, its HoldCo(s) or SPV(s), subject to and in accordance with applicable central and state regulations, provided that any credits or payments received are applied towards the REIT, its HoldCo(s) or SPV(s).”

The insertion of definition of ‘Common Infrastructure provides clarity as to what constitutes common infrastructure and provide additional flexibility to REIT to use green source of energy and use sustainable methods for conservation of environment.

Alignment of NRC composition of Managers/ Investment Managers for REITs, InvITs and SM REITs with LODR Regulations

Regulation 19(1) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 deals with the establishment of Nomination and Remuneration Committee (NRC) which prescribes that NRC must consist of at least three non-executive directors out of which at least two-thirds to be independent directors.

However, Explanation (v) under Regulation 26A of the REIT Regulations and Regulation 26G of the InvIT Regulations, interprets "non-executive director" as "independent director," thereby requiring that all members of the Nomination and Remuneration Committee (NRC) of REITs and InvITs be independent directors.

It is proposed to revise the Explanation (v) of 26A of SEBI REIT Regulations and 26G of SEBI InvIT Regulations as:

The expression "non-executive director" wherever it occurs, shall be read as "independent director" except Regulation 19(1) of SEBI (Listing Obligations and Disclosure Requirements) Regulations."

Previously, the composition of the Nomination and Remuneration Committee for REITs and InvITs required the inclusion of only independent directors.

However, the recent amendment now permits a mix of independent and non-executive directors, aligning it with the SEBI (Listing Obligations and Disclosure Requirements) Regulations.

Amendment of Governance Norms for reporting of quarterly results Reporting – InvITs

The governance norms as per Paragraph (c) of Part A of Schedule VII of the InvIT Regulations currently mandate that the quarterly results for the investment manager and its operational divisions or business segments be placed before the investment manager’s board.

It is proposed to amend the governance norms and clearly specify that the quarterly results pertain to InvIT and not the investment manager.

This amendment aims to clearly specify to ensure that the quarterly results to be placed before the Board pertain to InvIT and not the investment manager which is actually the intention of the regulations.

Allowing REITs, SM REIT Schemes and InvITs to deal in Interest Rate Derivatives for Hedging

InvIT Regulations do not include any instrument to hedge the interest rate risk on the existing borrowings or future borrowings through interest rate swaps.

To permit InvITs to participate in Interest Rate Derivatives, Forward rate Contracts and Interest Rate Swaps, subject to relevant disclosure in the Annual Report, solely to hedge an underlying interest rate risk.

For valuation, the InvITs shall follow the norms applicable and practiced by the Mutual Fund industry.

To specify similar provisions for REITs and SM REIT Schemes appropriately in the REIT Regulations.

This amendment will enable InvITs to hedge interest rate risks associated with both their current and future borrowings, thereby ensuring greater stability in cash flows and ultimately safeguarding the interests of unitholders.

Review of conditions for enhanced borrowings beyond 49% by InvITs

In case enhanced borrowing beyond forty-nine per cent is to be made, Regulation 20(3) of the InvIT Regulations, inter alia, requires track record of at least six distributions, on a continuous basis, post listing, in the year preceding the financial year in which the enhanced borrowings are proposed to be made.

The additional wait period imposed for meeting the requirement of minimum of six distributions in the preceding financial year shall be removed subject to fulfillment of certain conditions.

InvITs typically make quarterly or half-yearly distributions, which means it currently takes about two to three years for a newly listed InvIT to complete six distributions. Additionally, they must wait until the end of the financial year following the sixth distribution before they can access debt capital for asset expansion, leading to variable waiting periods.

By eliminating this extended waiting period, InvITs will be able to raise debt as needed, in compliance with specific conditions, and expand their asset base by securing additional capital for acquisitions and development. This will ultimately enhance unitholder value.

Timeline for filling up of vacancy in the office of the Board of Directors of Manager of REIT (Including SM REIT Schemes) / Investment Manager of InvIT

REIT Regulations and InvIT Regulations inter-alia require at least half of the board of directors of the Manager / Investment Manager to comprise independent directors at all times. The Regulations also require the board of directors to comprise of at least six directors and at least one woman independent director.

However, they do not specify any time frame within which any vacancy arising in the office of a director must be filled.

If a vacancy occurs in the office of a director of the manager/investment manager that affects compliance with the Board of Directors composition as per REIT/InvIT Regulations, it must be filled as follows:

A) If the vacancy is due to the expiration of a director’s term, it should be filled by the date the office is vacated.

B) If the vacancy arises for any other reason, it must be filled as soon as possible, but no later than three months from the date of the vacancy.

The amendment shall provide adequate time to the Manager of REIT / Investment Manager of InvIT / Investment Manager of SM REIT for filing up the vacancies in the office of directors.

This will be in alignment with the LODR Regulations and will ensure that the board composition at all times, continue to comply with the regulations.

Clarification on the requirement of Credit Rating to be obtained by REITs, InvITs and SM REIT Schemes for borrowings

REIT Regulations and InvIT Regulations inter-alia require REIT/ scheme of SM REIT/ InvIT to obtain credit rating from a credit rating agency as and when their consolidated borrowings and deferred payments exceed the prescribed thresholds.

However, it is not clearly specified as to whether the credit rating required to be obtained is for the loan / borrowing specific rating or trust level rating.

It is proposed to clarify in the regulations that the credit rating required to be obtained under the REIT Regulations and InvIT Regulations is the issuer rating of the REIT / InvIT / scheme of SM REIT, and not specific to only the further borrowings made.

This amendment seeks to provide greater clarity in the regulations.

Inclusion of fixed deposits as cash and cash equivalents for computation of leverage for REITs, InvITs and SM REIT Schemes

It is proposed to amend REIT Regulations and InvIT Regulations to specify that fixed deposit with scheduled commercial bank, be permitted to be reduced from total borrowings as well as from value of assets while computing leverage of REIT/InvIT/scheme of SM REITs provided such fixed deposits can be immediately converted into cash whenever required through a premature termination/ withdrawal option.

The amendment aims to promote ease of doing business.

The rationale for this change is that cash held by REITs, InvITs, SM REITs, or their HoldCos or SPVs is often placed in fixed deposits. Since these deposits can be readily liquidated, they should be excluded from the leverage calculation as they can be converted into cash whenever needed.

Expanding the asset base for REITs and SM REIT Schemes

Regulation 2(1)(zi) of the REIT Regulations defines “real estate” or “property”. It, inter alia, provides that any asset falling under the purview of ‘infrastructure’ as defined vide Notification of Ministry of Finance dated October 07, 2013 including any amendments or additions made thereof shall not be considered as ‘real estate’ or ‘property’ for the purpose of these regulations.

It further provides that list of assets which, although are captured within the abovementioned definition of infrastructure, shall be considered under “real estate” or “property”-

(i) hotels, hospitals and convention centers, forming part of composite real estate projects, whether rent generating or income generating;

(ii) “common infrastructure" for composite real estate projects, industrial parks and SEZ;”

It is proposed to amend the REIT Regulations to provide that any asset falling under the definition of ‘infrastructure’ to be considered as ‘real estate’ or ‘property’ (and hence eligible to be held as part of the REIT or SM REIT assets) if the following principle is met:

“The objective of holding such asset by the REIT (either directly or through underlying HoldCos / SPVs) shall be to earn fixed rental income from leasing out such asset and without assumption of any risk or reward arising out of or related to the operation of such asset.”

The current REIT regulations stipulate that assets classified as "infrastructure" do not fall under the definition of ‘real estate’ or ‘property’ and, therefore, cannot be held by REITs. However, certain assets, such as warehouses, hotels, and data centers, may only be considered infrastructure if they meet specific criteria related to investment size, location, and function.

This creates confusion for REITs in determining which assets qualify as infrastructure, thereby limiting the types of assets that can be held within REIT portfolios.

To address this, it is proposed that the REIT regulations be amended to allow any asset that qualifies as "infrastructure" under the applicable definition to also be considered as ‘real estate’ or ‘property,’ provided it meets the prescribed principles.

This would make such assets eligible for inclusion within the REIT or SM REIT portfolios.

Review of Investment in Unlisted Equity Shares by REITs

Regulation 18(5) of REIT Regulations provides a list of certain investments that are permitted by REIT, and which should not be more than twenty percent of the value of REIT assets. The said list of permitted investments, inter-alia, includes investment in unlisted equity shares of companies that derive not less than seventy-five percent of their operating income from real estate activity as per the audited account of the previous financial year.

However, InvITs, in terms of InvIT Regulations are not permitted to invest in the unlisted equity shares other than the equity shares of HoldCo and SPVs.

It is proposed that REITs shall not be permitted to invest in unlisted equity shares of companies other than Holdco and/or SPV as part of investment in real estate or property.

Additionally, for any existing investment in the unlisted equity shares by REITs, other than Holdco and SPvs, it is proposed to provide a certain glide path to either dispose of the investment or acquire the necessary stake to qualify such investment in the companies as an investment in HoldCo/ SPV.

The proposed amendment seeks to align REIT regulations with InvITs Regulations by excluding unlisted equity shares of companies, other than Holdcos and SPVs, from the list of eligible investments for REITs.

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Review of Investment in Liquid Mutual Funds – REITs and InvITs

Regulation 18 of InvIT Regulations and Regulation 26T of REIT Regulations applicable to SM REITs, provides that not more than twenty percent of the assets may be invested as per the list of permitted investments which, inter-alia, include investment in liquid mutual funds.

While REITs are also permitted to invest not less than eighty percent of the value of the REIT assets in completed and rent and/or income generating properties, they are not permitted to invest in liquid mutual funds.

It is proposed to permit REITs to invest in liquid mutual funds under permitted list of investments which should not be more than twenty percent of the value of REIT assets.

It is also proposed to permit investment by REITs (including SM REITs) and InvITs in liquid mutual funds schemes where the credit risk value is more than equal to 12 and falls under the Class A-I in the potential risk class matrix as specified under SEBI Master Circular for Mutual funds.

The proposed amendment seeks to harmonize the REIT Regulations with the regulatory framework governing InvITs and SM REITs, ensuring consistency across these investment structures.

In addition, the introduction of a minimum credit risk threshold is designed to safeguard the investments held by REITs and InvITs. By establishing this safeguard, the amendment aims to protect the funds from excessive credit risk, thereby enhancing the security of the investments.

This approach ensures that the capital remains protected and can be effectively deployed in appropriate real estate or infrastructure projects in the future.

Roles & Responsibilities of Trustee for REITs, InvITs and SM REITs

Regulation 9 of Chapter III of REIT Regulations and InvIT Regulations provide the rights and responsibilities of trustee.

It is proposed to amend the REIT Regulations and InvIT Regulations to specify certain principles for trustees of REITs (including SM REITs) and InvITs and provide an illustrative list of roles and responsibilities of trustees.

The proposal aims to formally define the principles outlining the roles and responsibilities of trustees, alongside providing an illustrative list of their specific duties.

It also seeks to offer greater flexibility to trustees in fulfilling the principles associated with their role. The objective is to strengthen and enhance the existing framework for the responsibilities of trustees within REITs (including SM REITs) and InvITs, ensuring clearer governance and more effective oversight.