SEBI (REITs) Regulation, 2014

SEBI (REITs) Regulation, 2014 (Part 1)

Introduction: The SEBI (REITs) Regulation, 2014, enables fund raising through Initial Public Offer, Private Placement of Units, and borrowings through issue of Commercial papers for real estate projects.
Definition of REIT: A Real Estate Investment Trust (REIT) means a person that pools rupees fifty crores or more for the purpose of issuing units to at least two hundred investors to acquire and manage real estate assets.
Key Players:
- Sponsor: A company/LLP/body corporate that sets up the REIT, with a net worth of not less than Rs. 100 crore and at least five years of experience in real estate development or fund management.
- Manager: A company/LLP/body corporate that manages assets and investments of the REIT, with a net worth of not less than Rs. 10 crore and at least five years of experience in fund management or advisory services.
- Trustee: A person who holds the REIT assets in trust for the benefit of the unit holders, registered with SEBI and not an associate of the sponsor or manager.
Structure of REITs: The structure of REIT is similar to that of a Mutual Fund, with a trustee company, sponsor, and asset management company.
Rights and Responsibilities: The Trust Deed outlines the responsibilities of the Trustee, and the Investment Management Agreement governs the relationship between the Manager and the Trustee.
Key Terminologies:
- Holdco: A holding company that holds not less than 50% of the equity share capital or interest in a Special Purpose Vehicle (SPV).
- Unit: A beneficial interest of the REIT.
- Unit Holder: A person who owns units of the REIT.
- Completed Property: A property for which an occupancy certificate has been received.
- Related Party: Parties to the REIT, promoters, directors, and partners.
Registration and Eligibility Requirements: An application for grant of certificate of registration as REIT shall be made by the sponsor on behalf of the Trust, accompanied by a non-refundable application fee, and shall meet certain conditions, including having a fit and proper person as a party to the REIT.

SEBI (REITs) Regulation, 2014 (Part 2)

Certificate of Registration: SEBI grants a certificate of registration to a REIT after payment of the requisite fees and fulfillment of requirements. The registration may be granted with conditions deemed appropriate by SEBI.
Conditions of Certificate: The certificate is subject to conditions, including:
- Abiding by the provisions of the SEBI Act and REIT Regulations
- Informing SEBI of any false or misleading information or material changes
- Satisfying eligibility conditions at all times
- Complying with the Code of conduct as specified in the Schedule VI to the REIT Regulations
Online Filing System: SEBI has introduced an online system for filings related to REITs, facilitating ease of operations for registration, reporting, and compliances.
Rights & Responsibilities of Parties to an REIT:
- Trustees:
  - Hold REIT assets for the benefit of unit holders
  - Enter into an investment management agreement with the manager
  - Oversee the manager's activities
  - Obtain compliance certificates from the manager
  - Ensure the manager complies with reporting and disclosure requirements
  - Review transactions between the manager and its associates
  - Make distributions and ensure timely declaration of distributions
  - Keep the subscription amount in a separate bank account
  - Ensure the remuneration of the valuer is not linked to the value of assets being valued
  - Convene meetings of unit holders and oversee voting
  - Require the manager to set up systems and procedures for effective monitoring
  - Take up matters with SEBI or the designated stock exchange
  - Appoint a new manager in case of removal or change
  - Obtain prior approval from unit holders and SEBI for change in control of the manager
  - Not invest in units of the REIT
  - Ensure the REIT operates in accordance with the trust deed, REIT Regulations, and offer documents
  - Provide information to the Board and designated stock exchange
  - Inform the Board of any act detrimental to unit holders' interests
- Manager:
  - Make investment decisions for the REIT
  - Ensure proper legal and marketable titles for REIT assets
  - Ensure compliance with investment conditions and strategy
  - Undertake management of REIT assets, including lease management and maintenance
  - Appoint valuers, auditors, registrars, and other intermediaries
  - Arrange for adequate insurance coverage
  - Develop under-construction properties
  - Ensure adequate infrastructure and personnel
  - Be responsible for issue and listing of units
  - Ensure disclosures are material, true, and adequate
  - Declare distributions to unit holders
  - Ensure redressal of unit holders' grievances
  - Ensure compliance with regulations and guidelines
  - Ensure segregation of activities as manager of the REIT
  - Not obtain commission or rebate
  - Ensure valuation of REIT assets is done by the valuer
  - Submit reports to the trustee, including quarterly reports and valuation reports
  - Coordinate with the trustee on REIT operations
  - Ensure computation and declaration of NAV
  - Ensure audit of accounts is done annually
  - Appoint a custodian
  - Place a report on activity and performance before the board of directors
  - Designate a compliance officer
  - Convene meetings of unit holders
  - Ensure compliance with laws and regulations
- Sponsors:
  - Set up the REIT and appoint trustees
  - Transfer shareholding or interest to the REIT prior to allotment of units

SEBI (REITs) Regulation, 2014 (Part 3)

Sponsor Requirements: The sponsor(s) and sponsor group(s) shall collectively hold not less than 15% of the total units of the REIT for three years from the date of listing of units in the initial offer.
Lock-in Period: The units required to be held by the sponsor(s) and sponsor group(s) shall be locked in and shall not be encumbered.
Valuer Responsibilities: The valuer shall ensure that the valuation of the REIT assets is impartial, true, and fair, and shall conduct valuation with transparency and fairness.
Auditor Rights and Responsibilities: The auditor has the right to access the books of accounts and vouchers, and shall ensure that the accounts and financial statements give a true and fair view of the state of affairs of the REIT.

Fund Raising by REIT

Initial Public Offer (IPO): REITs can raise funds only through an IPO, and the offer size shall not be less than Rs. 250 crore.
Minimum Public Holding: The minimum offer and allotment to the public through an offer document/placement memorandum shall be at least 25% of the total outstanding units of the REIT.
Subscription: The minimum subscription amount from any investor in the initial and follow-on offer shall be within the range of Rs. 10,000 to Rs. 15,000.
Strategic Investors: Strategic investors shall invest not less than 5% and not more than 25% of the total offer size, and shall enter into a binding unit subscription agreement with the Manager.

Offer Process

Draft Offer Document: The draft offer document shall be filed with SEBI and the designated stock exchange(s) not less than 30 working days before filing the offer document.
Offer Period: The initial public offer and follow-on offer shall be open for subscription for a minimum period of 3 working days and a maximum period of 30 days.
Allotment: The REIT shall allot units to the applicants on a proportionate basis rounded off to the nearest integer, subject to the minimum subscription amount per subscriber.
Listing: The units should mandatorily be listed on the stock exchange within 6 working days of the close of the issue in case of publicly offered units.
Refunding: In case of under-subscription, subscription money is to be refunded to all the applicants if at least 90% of the fresh issue size is not received as specified in the offer document.

SEBI (REITs) Regulation, 2014 (Part 4)

Retention by the REIT: In case of over-subscription, the money to be retained (maximum 25% of the issue size) shall be mentioned in the offer document.
Refund and Interest: Money shall be refunded to applicants to the extent of over-subscription. REITs shall pay interest at 15% per annum from the closure of the issue if units are not listed or money is not refunded within the specified time.
Offer for Sale: Units may be offered for sale to the public.
General Purposes: The amount earmarked for general purposes shall not exceed 10% of the amount raised by the REIT.
Surrender of Registration Certificate: Failure to do an IPO within 3 years (extendable by 1 year) shall entail surrender of the Registration certificate.

Offer Document

Contents: The offer document shall include basic details of the REIT, details of the sponsor, manager, trustee, and other parties.
Information: It shall also include background of REIT, terms of issue, description of assets, business details, related party transactions, valuation methodology, audited financial statements, and sector-specific information.
Rights of Unit Holders: The offer document shall include information on the rights of unit holders, title and approval disclosures, litigations, regulatory actions, risk factors, and taxation aspects.

IPO Advertisements

Guidelines: IPO advertisements shall not be misleading, contain anything extraneous to the offer document, or provide guaranteed returns to investors.
Required Documents: The following documents need to be provided along with the draft offer document and offer document/placement memorandum: declarations, full valuation report, due diligence certificate, and in-principle approval from the exchange(s).

Further Issues

Fast Track Issue: REITs can file an offer document under the Fast Track Issue with Stock Exchanges and a copy with SEBI if they fulfill certain parameters.
Preferential Offer/Institutional Placement: A listed REIT can make a preferential offer only to Institutional Investors.
Trading Lot: The trading lot shall be of ONE unit.

Listing and Delisting

Listing Conditions: It is mandatory for units of all REITs to be listed on a recognized stock exchange.
Delisting: The manager can apply for delisting of units if public holding falls below the specified limit, no projects or assets remain, or unit holders apply for delisting.
Procedure: The procedure for delisting shall be in accordance with the listing agreement and SEBI guidelines.

Issuance of Debt Securities

Applicable Regulations: REITs shall follow SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, for issue of debt securities.
Debenture Trustees: REITs shall appoint one or more debenture trustees registered under SEBI (Debenture Trustees) Regulations, 1993.
Security Creation: Secured debt securities shall be secured by a charge on the assets of the REIT or holdco or SPV.

Borrowings

Limit: The aggregate consolidated borrowings cannot exceed 49% of the value of the REIT Assets.
Credit Rating and Approval: If borrowings are between 25% to 49%, credit rating and approval of unit holders are required.
Commercial Paper: REITs with a net worth of INR 100 Crore or higher can issue Commercial Papers.

Valuation of Assets

Valuer: The valuer shall not be an associate of the sponsor(s) or manager or trustee and shall have more than five years of experience in valuation of real estate.
Valuation Report: A full valuation report shall include a detailed valuation of all assets of the REIT and shall be filed within 15 days from the receipt of the report.
Frequency: A full valuation shall be conducted once in every financial year, and a half-yearly valuation shall be conducted for the half-year ending on September 30.

Investment Conditions

Investment: The investment by an REIT shall only be in Holding company and/or SPVs or properties or securities or TDR in India.
Restrictions: The REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage-backed securities.
SPV Investment: The REIT may invest in properties through SPVs subject to certain conditions.

SEBI (REITs) Regulation, 2014 (Part 5)

Related Party Transactions: All related party transactions shall be on an arms-length basis in accordance with relevant accounting standards and shall be disclosed in the offer document, to the designated stock exchanges and unit holders periodically.
Post Listing - Prior Approval of Unit Holders: Prior approval of Unit holders is necessary if the total value of all related party transactions exceeds 10% of the value of REIT or the value of funds borrowed from related parties exceeds 10% of total consolidated borrowings.
Rotation of Valuers: No Valuer shall undertake valuation for the same property for more than 4 years consecutively, and a full valuation of the property shall be done within 2 months from the date of any material development.
Dispute Resolution: Disputes between investors and the Manager are subject to a resolution mechanism that includes mediation, conciliation, and/or arbitration.

Continual Disclosures to Stock Exchange

Annual and Half-Yearly Reports: The manager of all REITs shall submit an annual report and half-yearly report to all unit holders and the designated stock exchanges.
Unit Holding Pattern: The unit holding pattern needs to be disclosed for each class of unitholders one day prior to listing, within 21 days from the end of each quarter, and within 10 days of any capital restructuring.
Financial Information: An REIT shall submit its half-yearly and audited annual financial information to the Stock Exchanges, and the financial information shall be disclosed on a standalone and consolidated basis.

Event-Based Disclosure

Acquisition or Disposal of Properties: Disclosure is required for acquisition or disposal of any properties exceeding 5% of the value of REIT assets.
Additional Borrowing: Disclosure is required for additional borrowing at the level of HoldCo or SPV or REIT, exceeding 5% of the value of REIT assets.
Credit Rating: Disclosure is required for any credit rating obtained by the REIT and any change in such rating.

Maintenance of Records

Records to be Maintained: The manager shall maintain records of decisions, investments, agreements, insurance policies, investment management agreements, and other material documents for a period of not less than seven years.

Investor Charter and Disclosure of Investor Complaints

Investor Charter: All registered Merchant Bankers are advised to disclose the Investor Charter for Public Offer by REITs on their websites.
Investor Complaints: Merchant Bankers shall disclose investor complaints and redressal of the same on their websites.

Disclosures to the Investors

Annual and Half-Yearly Reports: The Manager shall submit annual and half-yearly reports to the Unit holders.
Acquisition or Disposal of Projects: Disclosure is required for acquisition or disposal of any projects exceeding 5% of the value of REIT assets.
Additional Borrowing: Disclosure is required for additional borrowing exceeding 5% of the value of REIT assets.

Board Composition and Role

Minimum Directors: The REIT Board should have a minimum of 6 Directors with one woman Independent Director.
Quorum: The quorum for the board meeting shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director.
Nomination Rights: Unitholder(s) holding 10% or more of the total outstanding units of the REIT have the right to appoint a Nominee Director on the Board of Directors of the Manager.

SEBI (REITs) Regulation, 2014 (Part 6)

Key Concepts

Vigil Mechanism: The manager shall formulate a vigil mechanism, including a whistle blower policy for directors and employees to report genuine concerns.
Secretarial Compliance Report: A secretarial compliance report given by a practicing company secretary is required to be filed with the stock exchanges, within 60 days from the end of each financial year and annexed to the Annual Report.
Quarterly Compliance Report: A quarterly compliance report on Corporate Governance is to be filed with exchanges within 21 days from the end of the quarter.
Annual Meeting of Unit Holders: An annual meeting of all unit holders shall be held not less than once a year within 120 days from the end of the financial year, and the time between two meetings shall not exceed 15 months.
Website Maintenance: REITs should maintain a functional website containing:
- Details of business
- Financial information
- Email id for Investor grievances
- Contact details of designated officials
- Notices, calls letters, circulars
- All reports, including Compliance Reports filed with the stock exchanges
- All intimations made by REITs to stock exchanges

Inspection by SEBI

SEBI Inspection: SEBI has powers to conduct inspections on the activities of REITs, which may result in:
- Delisting of units from stock exchanges and surrender of the certificate of registration
- Winding up of the REIT
- Sale of assets
- Taking action against parties to the REIT
- Prohibiting the REIT or parties to the REIT from operating in the capital market or accessing the capital market for a specified period.

Review Questions

Notice to unit holders of REIT may be given through emails registered with REIT.
Unit holding pattern of REIT is required to be disclosed for each class of unitholders, but the specific timeframe is not mentioned in the provided text.
The specific net worth requirement for REITs to issue Commercial Papers (CPs) is not mentioned in the provided text.
In case the sponsor of REIT is an individual, the following are not included in the sponsor group: brother-in-law's wife.