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Ergo Update

01-Apr-2020

As part of its consistent efforts to boost the product, the Securities and Exchange Board of India (SEBI) had permitted listed real estate investment trusts (REIT) to raise funds from the primary market through follow on public offerings, preferential issues, institutional placements and rights issues. The legal framework supporting such fund raising routes have been notified by SEBI from time to time. On 13 March 2020, SEBI issued a circular (Circular), amending and clarifying codified provisions guiding fund raising by listed REITs – this newsletter discusses and analyses the Circular.

Notable amendments bought about by the Circular

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Fast-track rights issues

 

SEBI has permitted listed REITs to undertake a “fast track rights issue”, subject to the REIT meeting certain eligibility conditions. A fast-track rights issue is a framework through which the timeline of a rights issue is “fast-tracked”. In India, this process includes exemption from SEBI review of the letter of offer, thereby reducing the timelines by a couple of months approximately.

A listed REIT meeting the following eligibility conditions can undertake a fast track rights issue:

 

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the units must be listed on a stock exchange for a period of at least three years prior to the record date. The term “stock exchange” would mean any recognised stock exchange, by implication;

 

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all units must in dematerialised form as on the record date;

 

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the average market capitalisation of the REIT’s public unitholding should be at least `250 crores;

 

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the REIT is in compliance with the listing and disclosure requirements prescribed by the REIT Regulations. We read this requirement to mean that the REIT must be in compliance with such requirements as on the date on which the letter of offer is approved by the board of directors;

 

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the REIT (through its investment manager) has redressed at least 95% of investor complaints received till the end of the quarter preceding the month of the record date;

 

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no show-cause notices have been issued or prosecution proceedings have been initiated by SEBI which are pending against the REIT, parties to the REIT (being sponsor group(s), re-designated sponsor(s), if any, the investment manager and the trustee) or their respective promoters or partners or directors, as on the record date;

 

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the REIT, parties to the REIT or their respective promoters or partners or directors have not settled any alleged violation of securities laws through the consent or settlement mechanism with SEBI during three years immediately preceding the record date;

 

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the units have not been suspended from trading as a disciplinary measure during the period of three years preceding the record date;

 

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no regulatory action has been imposed on the REIT for a period of at least three years prior to the record date. However, imposition of monetary fines by stock exchanges on the REIT shall not be a ground for ineligibility for undertaking fast track rights issues. In our view, the test of there being no regulatory action applies only to the REIT and not on each asset SPV or holding company, forming a part of the portfolio;

 

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there shall be no conflict of interest between the lead merchant banker(s) and the REIT or parties to the REIT in accordance with the applicable regulations;

 

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there is no audit qualifications on the REIT’s audited accounts, in respect of those financial years which are proposed to be disclosed in the letter of offer. The audited accounts shall mean the combined accounts of the REIT and not the standalone numbers of each asset SPV;

 

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the sponsor and sponsor group shall mandatorily subscribe to their rights entitlement and shall not renounce their rights, except to the extent of renunciation within the respective sponsor group or for the purpose of complying with minimum public shareholding norms prescribed under the SEBI REIT Regulations.

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Lock-in of units allotted to sponsor group on a preferential basis

 

SEBI has revisited the lock-in requirements for the units allotted by a REIT to its sponsor(s) and sponsor group while undertaking a preferential allotment. While, vide an earlier circular, SEBI required the units allotted to sponsor(s) and sponsor group to be locked-in for a prescribed period from the date of receipt of trading approval, for computing such lock-in requirements, units locked-in as per the requirement under the REIT Regulations were required to be considered. However, vide the Circular, SEBI has specified that not more than 25% of the total unit capital of the REIT shall be locked in for a period of three (3) years and any units allotted in excess of 25% of the total unit capital of the REIT shall be locked in for a period of one (1) year.

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Pro forma Financial Disclosure

 

The REIT Regulations mandate a REIT, which has undertaken an acquisition or disposal of a material asset, post the period for which financial information is included in either a letter of offer (for a rights issue) or a placement document (for an institutional placement) but before the date of such offering document, to also include pro forma financials for the interim period not covered in the letter of offer/placement document which are certified by the REITs statutory auditor, as an additional disclosure. SEBI vide the Circular, to specified that the REITs need to include pro formal financials for the last completed financial year and the applicable stub period.

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Additional Financial Disclosure for institutional placement of units

 

In case of an institutional placement, a REIT is required to prepare a detailed placement memorandum, akin to a placement document in case of a qualified institutions placement under the SEBI ICDR Regulations. In addition to the requirement of including pro forma financials, SEBI has also introduced the requirement of including in the placement document, a summary of the audited standalone financial statements of the assets that are proposed to be acquired by the REIT, for the previous three years and the applicable stub period.

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Validity of financials being included in the placement document

 

The lead merchant banker has been mandated to ensure that the financial information in the placement document are not older than 6 months from the issue opening date. Further, REITs that are in compliance with the REIT Regulations, have been permitted to include unaudited financials with limited review for the stub period, in the placement document, subject to making necessary disclosures.

Comments

In an anticipated yet welcome move, the regulator has brought about much needed changes to the fund raising frameworks for REITs, which seeks to plug loopholes and clarify regulatory intent. As mentioned earlier, the introduction of ‘fast-track’ rights issues for REITs is a clear signal of SEBI’s intent to assist in developing a market for REITs in India, similar to that of most developed securities jurisdictions, and towards its commitment to facilitate ‘ease of doing business’ in India. Certain financial and other disclosure requirements which were absent from the preferential allotment and institutional placement frameworks for REITs, have been addressed.

-       Subhayu Sen (Partner) and Aayush Mohata (Principal Associate)

For any queries please contact: editors@khaitanco.com

Subhayu Sen (partners)

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