SEBI proposes measures for Small and Medium REITs’ Ease of Business

SEBI is introducing measures to simplify operations and enhance regulatory clarity for Small and Medium Real Estate Investment Trusts (SM REITs). The proposal aims to amend the REIT Regulations, 2014, and facilitate Ease of Doing Business (EoDB). As of November 2024, three SM REITs are registered under the updated framework introduced in March 2024. The measures focus on three key areas: standardizing disclosures in scheme offer documents, refining the public issue process, and aligning provisions for SM REITs with larger REITs. SEBI’s Hybrid Securities Advisory Committee (HySAC) reviewed feedback from six public respondents, including market participants and legal firms, who broadly agreed with the proposed changes. Additional clarifications include redefining borrowing norms and deferred payments, treating investments in overnight mutual funds as cash equivalents, and excluding these from asset valuations. SEBI has proposed a six-month compliance period for addressing leverage limit breaches caused by market fluctuations. These measures aim to provide a streamlined operational framework for SM REITs, fostering growth and investor confidence in the sector.

Securities Exchange Board of India

Measures towards Ease of Doing Business for Small and Medium Real Estate Investment Trusts

1. Objective

1.1. This Board Memorandum proposes amendments to the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) to introduce measures for Ease of Doing Business (“EoDB”) for Small and Medium REITs (“SM REITs”).

1.2. This Board Memorandum also proposes to apprise the Board of the guidelines to be issued by SEBI by way of circular to give effect to EoDB measures for SM REITs.

2. Background

2.1. SEBI notified REIT Regulations on September 26, 2014. The details of REITs which are listed and their value of assets as on September 30, 2024 are tabulated below:

2.2. REIT Regulations were amended on March 08, 2024 to facilitate SM REITs by introducing a new framework for providing due regulatory oversight, uniform disclosures and investor grievance redresses mechanism. The details of SM REITs which are registered as on November 30, 2024 are tabulated below:

2.3. Similar to REITs, SM REITs are required to be set up as a Trust under the Indian Trust Act, 1882 and shall be registered under the REIT Regulations. However, unlike REITs, a SM REIT has the ability to create separate scheme(s) for owning of real estate assets through Special Purpose Vehicle(s) (“SPVs”) constituted as companies in the form of wholly owned subsidiaries of the scheme of SM REIT, and hold assets with value of at least Rs. 50 crores (vis-à-vis minimum asset value of Rs. 500 crores for REITs). This allows investors with a choice to invest in a scheme of SM REIT which holds real estate assets suiting the investor’s investment preference and criteria.

2.4. Pursuant to the notification of regulatory framework for SM REITs, various workshops with prospective SM REIT applicants were held inter-alia to sensitize the industry about the recently introduced regulations. In such workshops, feedback have been received on certain aspects related to the framework for SM REITs (which are detailed in the ensuing paras) and based on such feedback, proposals have been made in this Board Memorandum.

3. Working Group on SM REIT and SEBI Hybrid Securities Advisory Committee

3.1. To improve ease of doing business related to activities of SM REITs, a Working Group on SM REIT was constituted by SEBI with the following terms of reference:

3.1.1. to examine the disclosure requirements in the offer document applicable for REITs in case of initial offer vis-à-vis a mutual fund scheme and advise on the format of scheme offer document for initial offer by a scheme of SM REIT, including migration related disclosures.

3.1.2. to examine the guidelines for public issue of units by a REIT and advise changes required to be made therein for initial offer by a scheme of SM REIT in light of the distinct features of a SM REIT vis-à-vis REIT.

3.1.3. any other matter pertaining to SM REIT, as considered appropriate by SEBI.

3.2. SEBI  Hybrid Securities Advisory Committee (“HySAC”) provides recommendations, inter-alia, on development and regulation of REITs and InvITs in India. The report submitted by the Working Group on SM REIT comprising its suggestions was placed before the HySAC and based on the recommendations of HySAC, SEBI issued a consultation paper titled “Consultation paper on Ease of Doing Business for Small and Medium REITs” seeking comments / views / suggestions from the public on the EoDB measures.

3.3. In order to promote ease of doing business and provide clarity to the market participants on certain aspects pertaining to SM REITs, this Board Memorandum contains proposals on the below mentioned three matters. The recommendations of the HySAC along with public feedback on the consultation paper have been considered in the proposals made to the Board:

3.3.1. Standardizing the disclosures in scheme offer document

3.3.2. Public issue process for scheme of SM REIT

3.3.3. Alignment of provisions for SM REITs vis-à-vis REITs

4. Consultation

4.1. A total of 6 entities responded to the consultation paper with their views/ inputs/ suggestions. The respondents inter-alia include market participants, stock exchange and consulting and law firms. The respondents are broadly in agreement with the proposed measures and a summary of the respondents agreeing / partially agreeing / disagreeing to the proposals made in the consultation paper is as under:

4.2. The proposals made in the consultation paper, public feedback received on the same, recommendations of HySAC and views of SEBI thereon are summarized at Annexure A. The reference to relevant tables of Annexure A has been made in the proposals mentioned in subsequent paras.

5. Standardizing the disclosures in scheme offer document (Table No. 1)

5.1. Extant Regulatory Provision

5.1.1. Regulation 26R(2) of the REIT Regulations requires as under:

“The investment manager shall, through a merchant banker, file the draft scheme offer document with the Board, along with fees specified in Schedule IIA and with the designated stock exchange.”

5.1.2. Regulation 26S(1) of the REIT Regulations requires as under:

“The scheme offer document shall make all disclosures as specified in Schedule III and any other disclosures as specified by the Board from time to time.”

5.2. Rationale for Change

5.2.1. It is understood from interaction with prospective SM REIT applicants that since SM REITs are permitted to launch multiple schemes, a structure of scheme offer document similar to Mutual Funds may be considered to facilitate the processing of scheme offer document.

5.2.2. Accordingly, the Working Group on SM REIT was constituted by SEBI inter-alia to examine the disclosure requirements in the offer document applicable for REITs in case of initial offer vis-à-vis a mutual fund scheme and advise on the format of scheme offer document for initial offer by a scheme of SM REIT.

5.2.3. Based on suggestions of the Working Group, HySAC recommendations on the same and feedback on the public consultation, the proposals are detailed in the next para.

5.3. Proposal

5.3.1. It is proposed to amend the REIT Regulations to provide the following provisions pertaining to scheme offer document filed by a scheme of SM REIT.

5.3.2. Bifurcation of Scheme Offer Document: The filing of scheme offer document shall be made in two parts, namely ‘Key Information of the Trust (KIT)’ and ‘Key Information of the Scheme (KIS)’.

KIT shall contain disclosures related to the SM REIT, investment manager and trustee. KIS shall be a scheme-specific document and shall contain disclosures related to a particular scheme of the SM REIT and specific details of the asset(s) thereunder.

A new schedule IIIA is proposed to be inserted in the REIT Regulations to provide the disclosures in KIT (Part A of Schedule IIIA) and KIS (Part B of Schedule IIIA) along with instructions for preparation of scheme offer document. The proposed schedule IIIA is a part of the draft amendment notification placed at Annexure-B.

It is also proposed that SEBI may specify additional instructions and disclosure requirement, if any, for facilitating automated supervision and automated processing of data disclosed by the SM REIT schemes and the investment manager as part of continuous disclosure requirements.

5.3.3. Processing of KIT and KIS by SEBI: A single draft KIT (common for all schemes) shall be filed with SEBI along with draft KIS (i.e. both the documents shall be filed together) at the time of initial offer of the first scheme of SM REIT. SEBI may issue observations on the draft KIT and the draft KIS.

Thereafter, for subsequent scheme offer documents, processing of KIT and KIS will be done in the following manner:

5.3.3.1. if there is no change in the KIT vis-à-vis the KIT filed with SEBI as part of previous scheme offer document and the investment manager has submitted a declaration in this regard, then the KIT shall be filed by the investment manager with SEBI only for records along with draft KIS of subsequent schemes. SEBI may issue observations only on the draft KIS.

5.3.3.2. if there is any change in the draft KIT vis-à-vis the KIT filed with SEBI as part of previous scheme offer document, then the investment manager shall file the draft KIT along with the draft KIS of subsequent schemes with SEBI. SEBI may issue observations on the draft KIT as well as on the draft KIS.

5.3.4. Updating of KIT: The investment manager shall ensure that all material changes (including litigation and regulatory actions) in the KIT are made on an ongoing basis by way of an addendum which shall be disclosed on the website of SM REIT. The investment manager shall file the addendum with SEBI and the stock exchange(s) within 7 days from the date of occurrence of the material event.

Further, the investment manager shall ensure that KIT is updated every 6 months and updated KIT is disclosed on the website of SM REIT within 30 days from the end of half year. The investment manager shall file updated KIT with SEBI and stock exchanges for records within 30 days from the end of half year.

6. Public issue process for scheme of SM REIT (Table No. 2)

6.1  Extant Regulatory Provision

6.1.1. Chapter 2 of the Master Circular for REITs dated May 15, 2024 (“Master Circular”) provides the guidelines for public issue of units of REITs including provisions pertaining to filing of offer document, appointment and obligations of merchant banker, allocation in public issue, abridged version of offer document, public issue related timelines, price and price band, bidding process, allotment procedure, post issue reports, public communications and advertisements etc.

6.2. Rationale for Change

6.2.1. SM REITs in comparison to REITs have certain distinct features such as the ability to launch different schemes, minimum price of each unit of scheme being Rs. 10 lakhs, etc. In view of this, a Working Group on SM REIT was constituted inter-alia to examine the guidelines for public issue of units by a REIT and advise changes required to be made therein for initial offer by a scheme of SM REIT.

6.2.2. The provisions suggested by the Working Group for public issue by a scheme of SM REIT are largely in alignment with the provisions specified for public issue by REITs. Based on suggestions of the Working Group, HySAC recommendations on the same and feedback on the public consultation, the proposals are detailed in the next para.

6.3. Proposal

6.3.1. It is proposed to prescribe the following provisions pertaining to public issue of units by a scheme of SM REIT. The provisions specified at para 6.3.2 and 6.3.3 below will be specified by way of a circular.

6.3.2. Chapter 2 of the Master Circular be mutatis mutandis made applicable for public issue of units by a scheme of SM REIT, except the following provisions:

6.3.2.1. Para 2.2.5. of the Master Circular as the timeline for issuance of observations by SEBI on the draft scheme offer document is already specified in Regulation 26R(9) of the REIT Regulations;

6.3.2.2. Para 2.5 of the Master Circular as the provisions pertaining to security

deposit by the Manager are not applicable in case of a SM REIT;

6.3.2.3. Para 2.13.1. (b) of the Master Circular as the timeline for submission of final post issue report is already specified in Regulation 26ZE of the REIT Regulations;

6.3.2.4. Para 2.14.1. to para 2.14.6. of the Master Circular as the provisions for advertisement pertaining to issue of units by a scheme are already specified in Regulation 26Z of the REIT Regulations;

6.3.2.5. Para 2.16.1. of the Master Circular as the provisions pertaining to cases where a SM REIT is not eligible to make an initial offer of units of a scheme are already specified in Regulation 26P(1) of the REIT Regulations;

6.3.2.6. Para 2.16.3. of the Master Circular as the provisions pertaining to prohibition on payment of incentives in respect of initial offer by a scheme of SM REIT are already specified in Regulation 26ZA of the REIT Regulations;

6.3.2.7. Annexure-1 (formats of due diligence certificates), Annexure-2 (formats of post issue reports) and Annexure-3 (format of abridged version of the offer document) of the Master Circular – to provide explicit clarity on the formats of various reports and certificates required to be submitted by Merchant Banker at different stages of the public issue process, it is proposed that separate formats for these may be specified for SM REITs.

6.3.3. For the purpose of applicability of Chapter 2 of the Master Circular to public issue of units by a scheme of SM REIT:

6.3.3.1. any reference to the “REIT” under the applicable provisions of Chapter 2 shall be construed as a reference to the “SM REIT”;

6.3.3.2. any reference to the “manager” or the “sponsor” or the “sponsor group” under the applicable provisions of Chapter 2 shall be construed as a reference to the “investment manager” of the SM REIT;

6.3.3.3. any reference to the “offer document” under the applicable provisions of Chapter 2 shall be construed as a reference to the “scheme offer document” of the scheme of the SM REIT.

6.3.4. Additionally, the following is proposed to be made applicable for an initial offer by a scheme of SM REIT:

6.3.4.1. A scheme of SM REIT shall make an initial offer of its units by way of public issue only and in the manner as may be specified by the Board;

6.3.4.2. The requirement of ownership of assets under Regulation 26P(2)(a) of the REIT Regulations (i.e. the size of asset proposed to be acquired in a scheme of SM REIT should be at least rupees 50 crores and less than rupees 500 crores) may be complied at any point of time before allotment of units in accordance with the scheme offer document, subject to a binding agreement with the relevant party(ies) that such requirements shall be fulfilled prior to such allotment of units and, a declaration shall be sent to SEBI and to the designated stock exchanges to that effect and adequate disclosures in this regard shall be made in the scheme offer document;

6.3.4.3. The amount in relation to the investment manager’s contribution of 5%/15% of post-offer unitholding shall be deposited in a cash escrow bank account, 2 working days prior to the opening of the offer and the allotment of such units will be the part of the asset acquisition transaction;

6.3.4.4. The initial offer shall be made by the scheme of SM REIT within a period of not more than one year from the date of issuance of observations by SEBI. However, if the initial offer is not made within the specified time period, a fresh draft scheme offer document shall be filed;

In this regard, it may be noted that since property related parameters may undergo a change, hence prescribing a period of more than one year for coming out with an initial offer is not considered appropriate. Accordingly, a period of one year is proposed.

6.3.4.5. The investment manager shall ensure that the issue proceeds shall be used only for acquisition of assets as disclosed in the scheme offer document.

In case if the SM REIT is unable to acquire one or more assets proposed to be acquired as disclosed in the scheme offer document, then the entire amount raised from the offer shall be refunded to the investors in such manner as may be specified by SEBI and within the time as specified in the extant regulations.

6.3.4.6. The SM REIT shall not make any allotment in excess of the units offered through the scheme offer document in case of oversubscription. In case of oversubscription, the allotment of units to each category of investors shall not be less than the minimum bid lot, and the remaining available units, if any, shall be allotted on a proportionate basis (to be selected by a lottery);

However, in case of oversubscription, an allotment of not more than one per cent. of the net offer to public may be made for the purpose of making allotment in minimum lots;

6.3.4.7. The price of units of the scheme of SM REIT issued by way of public issue shall be determined through the book building process or any other process in accordance with the circulars or guidelines issued by SEBI and in the manner as may be specified by SEBI;

6.3.4.8. The minimum subscription amount shall be 90% of the fresh issue size as specified in the KIS in case of a scheme of SM REIT which opts to utilize leverage in accordance with the REIT Regulations. However, for a scheme of SM REIT which does not opt to utilize leverage, the minimum subscription amount shall be 100% of the fresh issue size.

6.3.4.9. The amount for general purposes, including issue expenses, legal expenses and other eligible expenses that SEBI may specify, as mentioned in objects of the offer in the KIS filed with SEBI, shall not exceed such amount as SEBI may specify from time to time;

6.3.4.10. Any person other than the investment manager holding units of the scheme of SM REIT prior to initial offer shall hold the units for a period of not less than one year from the date of listing of the units, subject to circulars or guidelines as may be specified by SEBI;

6.3.5. Since the proposals stated at para 6.3.2. and 6.3.3. will be specified by way of a circular, it is proposed to insert enabling provisions in the REIT Regulations that SEBI may specify by issuance of guidelines or circulars, provisions pertaining to issue, allotment, listing, trading of units of a scheme of SM REIT and advertisements in relation to public issue by a scheme of SM REIT.

7. Alignment of provisions for SM REITs vis-à-vis REITs (Table No. 3)

7.1. Background

7.1.1. As mentioned in para 2.4 above, feedback has been received on certain aspects related to the framework for SM REITs, in various workshops held with prospective SM REIT applicants. These aspects included matters such as what is the treatment of amount unclaimed / unpaid out of the distributions declared by a scheme of SM REIT, what will happen if the investment conditions are breached on account of factors such as change in tenants, expiry of lease, sale of property etc.

7.2. Rationale for Change

7.2.1. It is noted that the amendment regulations for SM REIT were based on the provisions of the REIT Regulations and provided that the provisions of REIT regulations, except Chapter II (Registration of Real Estate Investment Trusts), Chapter IV (Issue and Listing of Units), Chapter V (Investment Conditions, Related Party Transactions, Borrowing and Valuation of Assets) and Regulation 22 under Chapter VI (Rights and meetings of unitholders), shall mutatis mutandis be applicable to SM REITs. Provisions in respect of these chapters were separately specified in the regulatory framework notified for SM REITs in view of the distinct features of SM REIT vis-à-vis existing REITs.

7.2.2. It is also noted that the provisions dealing with matters mentioned at para 7.1.1 above are specified in Chapter V of the REIT Regulations, which is not applicable to SM REITs. Hence, to remove any ambiguity among the market participants and based on the recommendations of the HySAC and feedback on public consultation, it is proposed that the provisions detailed in next para pertaining to investment conditions and borrowings, as applicable for REITs, be extended to SM REITs.

7.3. Proposal

7.3.1. It is proposed to amend the REIT Regulations to specify the following provisions for SM REITs:

8. Proposal to the Board:

8.1. The Board is requested to

8.1.1. consider and approve the proposals as detailed under para no. 5 to 7 above and the consequent draft amendment notification placed at Annexure B;

8.1.2. authorize the Chairperson to make consequential and incidental changes and take necessary steps to give effect to the decisions of the Board.

Source: SEBI Board Meeting Dated: Wednesday 18th December 2024