Further amendments to the laws on REITS and INVITS in India
The Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (SEBI REIT Regulations) and the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 (SEBI InvIT Regulations), which were last amended on 27 December 2017, have been further amended by the notifications issued by the Securities and Exchange Board of India (SEBI) on 10 April 2018 (hereinafter referred to as the REIT Amendment Regulations and InvIT Amendment Regulations, respectively). The REIT and InvIT Amendment Regulations have been introduced to further facilitate the growth of infrastructure investment trusts (InvIT) and the real estate investment trusts (REIT).
- The SEBI REIT Regulations permit a REIT to invest in properties through a special purpose vehicle, subject to certain conditions. One such condition is that no other shareholder or partner of the special purpose vehicle shall have any rights that prevents the REIT from complying with the provisions of the SEBI REIT Regulations and an agreement is required to be executed, prior to such investment, with such shareholders or partners confirming that they have no such right. The REIT Amendment Regulations have imposed an obligation on the applicant to include a clause in such agreement that provides for an appropriate mechanism for resolution of disputes between the REIT and other shareholders or partners in the special purpose vehicle. The amendment has also clarified that in case of any inconsistency between such agreements and the SEBI REIT Regulations, the provisions of the SEBI REIT Regulations shall prevail.
- The REIT Amendment Regulations have made a similar amendment in case the REIT chooses to invest in properties through its holding company. In such a case, no other shareholder or partner of the holding company shall have any rights that prevent the REIT or the holding company or any special purpose vehicle from complying with the terms of the SEBI REIT Regulations. The REIT Amendment Regulations have made it mandatory for the shareholders’ or partnership agreement, if any, between such other shareholder or partner, to provide for an appropriate mechanism for resolution of disputes between the REIT and other shareholders or partners in the holding company and/or the special purpose vehicle. Further, in case of any inconsistency between such agreements and the SEBI REIT Regulations, the provisions of the SEBI REIT Regulations shall prevail.
- Prior to the notification of the REIT Amendment Regulations, an investment through special purpose vehicles or holding companies was subject to the manager, in consultation with the trustee, appointing the majority of the board of directors or the governing board of such special purpose vehicles or holding company. The amendment has now mandated that the manager, in consultation with the trustee, shall appoint at least such number of nominees on the board of directors or the governing board of such special purpose vehicle or the holding company, as applicable, which are in proportion to the shareholding or the holding interest of the REIT in such special purpose vehicle or holding company.
- The SEBI REIT Regulations include certain restrictions on investments of REIT assets. The REIT Amendment Regulations have permitted up to 20% of the value of REIT assets to be invested in unlisted equity shares of companies which derive not less than 75% of their operating income from real estate activity. However, such investments made in unlisted equity shares of a company, in under construction and/or completed and non-rent generating properties, shall be held by the REIT for a minimum period of three years from the date of completion or from the date of purchase, as applicable.
Devi Prasad Patel (Senior Associate) and Sathvik Ponnappa (Associate)
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