Securities and Exchange Board of India (“SEBI”), in the year 2014 notified the regulations governing the Real Estate Investment Trusts (“REITs”). As per the said regulations, every REIT shall need to offer its units by way of an initial public offering within a period of 3 years from the date of its registration with SEBI. As of this date, only 4 REITs are listed in India, and we are likely to see the listing of more REITs soon.
The year 2023 has been an eventful year so far as REITs are concerned as SEBI has ushered in a series of transformative changes in the legal and governance framework that oversees REITs. This year has been marked by SEBI’s proactive approach, as they issued several consultation papers, which were subsequently translated into a statutory framework. The first significant set of amendments, introduced in February, primarily centered around the establishment of a robust governance framework for REITs. Building upon this momentum, SEBI revisited the regulatory landscape in August, with a primary focus on delineating the rights and obligations of REIT Unitholders.
This Article presents the key changes in the regulatory regime governing REITs this year till date.
- *the definition of Independent Directors;
- *the definition of Senior Management;
- tenure and eligibility of auditor;
- requirement for limited review audit of entities or companies whose accounts are consolidated with REITs;
- *insertion of Chapter VIA and Schedule VII, specifically catering to the governance norms within the REIT Regulations;
- *applicability of select LODR provisions i.e., Regulation (2), (4), (5), (9), and (10) of Regulation 17 and Regulations 18, 19, 20, 21, 26, and sub-regulation (1), (2), (2A), (3), (4), (5), (7), (8), (9), (10) and (11) of Regulation 25; and
- *clarification on the interpretation of certain terms-
- the expression “promoters” to be read as “parties to the REIT”;
- the expression “listed entity” to be read as “Manager”;
- the expression “company secretary” to read as “compliance officer”;
- the expression “executive director” to be read as “non-independent director”;
- the expression “non-executive director” to be read as “independent director”;
- the expression “Board of Directors of the listed entity” to be read as “Board of Directors of Manager”; and
- the expression “subsidiary of listed entity” to be read as “HoldCo and/or SPV of REIT, as applicable”.
- Availability of Board Nomination Rights to Debenture Trustees of REIT
- Inception of Board Nomination Rights to Eligible Unitholders
- Revision in Minimum Unitholding Requirement of Sponsor and Sponsor Group
- Introduction of Self-sponsored REITs
- Establishment of Offer for Sale Framework for REITs
- Facility for conducting Unitholder Meetings through Video Conferencing
- Introduction of Legal Entity Identifier (LEI)
- Dematerialization of securities of Hold Cos and SPVs held by REITs
- Format for Annual Secretarial Compliance Report and Compliance Report on Governance for REITs
- Format for Compliance Report on Governance for REITs
- Pricing of Units in case of preferential issue and institutional placement
- Restriction on trading by Designated Persons – Trading Window Closure
- Foundation of Online Dispute Resolution Mechanism
- Framework for Board Nomination Rights by Unitholders
- Formulation of a Policy;
- Amendment of the Trust Deed and Investment Manager;
- Intimating the Unitholders of their nomination rights;
- Evaluation and eligibility confirmation of the candidate(s);
- Review and Reporting to the REIT Trustee
- Redressal of investor grievances through the SEBI Complaint Redressal (SCORES) Platform and linking it to Online Dispute Resolution platform
Governance norms now embedded in REIT Regulations
Previously, the corporate governance framework for REITs primarily fell under the purview of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) alone. However, this framework exclusively applied to high-value debt-listed REITs, those which had listed non-convertible debt securities with an outstanding value of five hundred crore rupees or more. In this context, corporate governance provisions specified in Regulations 16 to 27 of LODR Regulations, designed for listed entities, were also enforced in the case of REITs.
Notification dated January 17, 2023, amended the LODR Regulations stipulating that with effect from April 01, 2023, governance norms outlined in the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) only shall be applicable. Later, the Notification dated February 14, 2023, amended the REIT Regulations, inter-alia, providing the governance framework for REITs, thereby addressing the long-standing challenge and finding the right balance between understanding and applying corporate governance provisions tailored for listed companies under the LODR Regulations and the unique needs and distinct nature of REITs.
These amendments encompass a wide range of aspects, including –
*Applicable with effect from April 01, 2023
Notification dated February 02, 2023, made amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS Regulations") stipulating that listed entities with listed debt securities must appoint a nominee director to their Board, as and when nominated by their Debenture Trustee in case of events of default outlined in Regulation 15(1)(e) of the SEBI (Debenture Trustee) Regulations, 1993 and such appointment must be made within one month of receipt of such nomination.
Additionally, the amendments require listed entities with their debt listed to incorporate provisions in both their Trust Deed and Articles of Association, with respect to the obligation of the Board to appoint such nominee director nominated by the Debenture Trustee by September 30, 2023. However, for the first-time issuers of listed debt securities, the amendments to the Trust Deed and Articles of Association may be done within a period of six months from the date of such listing (circular dated February 09, 2023).
Thereafter, the Master Circular on REITs dated July 06, 2023, provided that in relation to REITs, the Articles of Association of the REIT Manager shall contain the aforesaid provision.
This requirement serves the paramount purpose of safeguarding the interests of debenture holders, in cases of default concerning interest payment, security creation, or debenture redemption. In the event of such defaults, heightened vigilance and oversight become imperative to shield the debenture holders’ interests.
Notification dated August 16, 2023, amended the REIT Regulations and granted a right to the unitholders who meet specific eligibility criteria i.e., holding not less than ten percent of the outstanding units of the REIT, to nominate a director to serve on the Board of the REIT Manager.
This regulatory change is a pivotal move aimed at empowering unitholders who hold substantial stakes in REITs ensuring that they have direct representation on the REIT Manager’s Board, thereby providing oversight and scrutiny of the REIT’s management.
Further, apart from various other obligations laid down thereunder, the Board of the REIT Manager is entrusted with the responsibility of formulating a robust policy outlining the appointment and evaluation criteria for these nominated directors. This policy should emphasize the importance of timely and well-qualified appointments, reinforcing the commitment to effective corporate governance within the REIT sector.
In addition to the granted right, eligible unitholders are now obligated to adhere to the Stewardship Code outlined in Schedule IX of the REIT Regulations. The amendments were followed by detailed guidelines as to the manner in which eligible unit holders shall exercise their rights to nominate a Director.
The Sponsor assumes a pivotal responsibility in the REIT’s ecosystem. The Sponsor’s involvement extends further, often via its shareholding in the REIT Manager, granting it substantial control over the Manager’s Board. This control becomes especially pronounced in key financing decisions, particularly with regard to long-term debt financing, a common feature in most REIT scenarios.
Through the release of a Consultation Paper dated February 2023 and later through Notification dated August 16, 2023, SEBI acknowledged the vital importance of having at least one sponsor involved throughout the entire lifespan of a REIT. This strategic move aims to secure the alignment of interests between the Sponsor and the unitholders.
Previously, the REIT Sponsor(s) and Sponsor(s) Group were mandated to hold a minimum of fifteen percent of the total REIT units for a period of at least three years from the date of listing of such units pursuant to the initial offer on a post-issue basis. Now, with the introduction of the Second Amendment, the regulatory framework has been updated to introduce different timelines for meeting this minimum requirement inter alia as indicated below:
Years of Listing in initial offer
SEBI also introduced a framework for self-sponsored REITs, which has been defined to mean the Manager of a REIT who has dual responsibilities of both the Manager as well as the sponsor. Self-sponsored REITs will create space for mature and independent professionally managed Managers to emerge and will provide a further exit option for the Sponsor in addition to the exit option through the change of sponsor presently envisaged in the REIT Regulations.
Numerous conditions to be complied with by REIT, Sponsor(s), and Manager for conversion of Manger to Self-Sponsored Manager have been laid down in the REIT Regulations.
Circular dated January 10, 2023, unveiled an all-encompassing framework for the sale of shares by listed companies through stock exchange mechanisms. Notably, this framework extends its applicability to encompass the offering of REIT units by sponsors or entities within the sponsor group, as well as other unitholders.
SEBI introduced the provisions for REIT Managers to conduct meetings with unitholders using video conferencing or other audio-visual methods through a circular issued on June 22, 2020, which was extended multiple times to cover subsequent periods.
Circular dated January 12, 2023, has now made this provision permanent, eliminating any set expiration date. This move aims to facilitate greater unitholder participation in meetings and enhance governance standards.
Circular dated May 03, 2023, obtaining Legal Entity Identifier (LEI) was mandated for issuers who are either listed or intend to list non-convertible securities, securitized debt instruments, and security receipts.
LEI is an exclusive 20-character global identifier assigned to legal entities and used to recognize legally separate entities involved in financial transactions.
As a result, REITs with their debt securities listed as of August 31, 2023, were required to acquire and disclose their LEI code in the Centralized Database of corporate bonds no later than September 1, 2023. Additionally, issuers planning to issue and list non-convertible securities on or after September 1, 2023, must report their LEI code within the Centralized Database of corporate bonds at the time of ISIN allotment.
Regulation 14(18) of REIT Regulations provides that the units of REIT shall be issued only in dematerialized form to all the applicants. Further, REIT holds securities in its Holding Companies and Special Purpose Vehicles.
In order to promote dematerialization of securities, encourage ease of doing business, improve transparency in the dealings of securities of SPVs/ Hold Cos, circular dated May 22, 2023, has directed the Manager of a REIT to ensure that the REIT shall henceforth hold the securities of Hold Cos and SPVs in dematerialized form only.
Further, for existing securities holdings by REITs in Hold Cos and SPVs in physical form, the REIT Manager was directed to dematerialize the securities of Hold Cos and SPVs of the REIT on or before June 30, 2023.
Regulation 26D of REIT Regulations requires the REIT Manager to submit a Secretarial Compliance Report by a practicing company secretary to the stock exchanges within 60 days from the end of each financial year.
Circular dated June 27, 2023, prescribed the format of Annual Secretarial Compliance Report for REITs with effect from financial year 2023-24 onwards.
Regulation 26D of REIT Regulations requires the REIT Manager to submit a quarterly compliance report on governance to the stock exchanges within 21 days from the end of each quarter.
Circular dated June 27, 2023, prescribed the format of Compliance Report on Governance for REITs with effect from financial year 2023-24 onwards. Accordingly, the first reporting in the said format shall be made for the quarter ended June 30, 2023.
SEBI introduced revised guidelines pertaining to preferential issues and institutional placements of units by listed REITs. This development, outlined in a circular dated July 5, 2023, brings significant changes to the criteria governing unit pricing.
Previously, SEBI had laid down distinct pricing norms for frequently and infrequently traded units. However, the recent amendment unifies these norms. Under the revised guidelines, institutional placements must occur at a price not lower than the average of the weekly high and low closing prices of units within the same class, as quoted on the stock exchange during the two weeks leading up to the relevant date.
This amendment is designed to enhance flexibility and transparency in the pricing of units during institutional placements. By factoring in the average prices over a two-week period, it serves to mitigate excessive fluctuations and guarantees equitable valuation for investors.
Circular dated August 5, 2022, introduced a framework aimed at implementing a system to restrict trading. This restriction would be achieved by freezing the Permanent Account Number at the security level during the closure period of the Trading Window.
Initially, this circular applied exclusively to listed companies that were components of benchmark indices such as NIFTY 50 and SENSEX. However, through a circular dated July 19, 2023 , SEBI has expanded the applicability of this framework to encompass all listed companies, including REITs (as the provisions of PIT regulations are applicable to REITs), implementing this extension in a phased manner.
Pursuant to the circular, listed companies are mandated to furnish certain particulars to the Designated Depository. These particulars include information concerning the listed ISIN of their equity shares, the company’s name, PAN, and confirmation of the demat account number, specifically, the DP ID and client ID (in cases where PAN exemptions apply).
Furthermore, it is incumbent upon the listed company to designate the first day immediately following the conclusion of each quarter as the ‘Trading Window Closure Commencement Date‘. Additionally, they must specify the date marking the conclusion of a 48-hour window post-disclosure of financial results as the ‘Trading Window Closure End Date‘. These details should be entered into the portal or platforms at least two trading days prior to the onset of the trading window closure date.
Circular dated July 31, 2023 , established a common Online Dispute Resolution Portal (“ODR Portal”), wherein the disputes arising between investors/ clients and listed companies/ regulated entities including REITs, in the securities market will be resolved by harnessing online conciliation and arbitration as specified in the circular.
REITs were required to register on the ODR portal i.e., https://smartodr.in/login on or before September 15, 2023, thereby facilitating the registration of an online dispute, if any, by any concerned investor. Additionally, they were advised to display a link to the ODR portal on the home page of their website and apps, if any alongside bringing the provisions of the circular to the notice of the investors/ clients and disseminating the same on their website.
On August 16, 2023, SEBI amended the REIT Regulations thereby granting the power of Board Nomination Rights to Eligible Unitholders(s) as explained in para C(1) above.
In continuation to such amendment, SEBI issued a circular on September 11, 2023 , providing a comprehensive framework on the exercise of Board nomination rights by such Eligible Unitholders. Annexure A of the Circular lists certain mandatory requirements to be met by the REIT Manager, inter-alia including:
The Circular entails certain other points on eligibility criteria for such Nominee Director, repercussions on the vacation of office by such Director, change of such Director, etc.
Circular dated September 20, 2023, elaborated on the process of Redressal of Investor Grievances through the SCORES Platform while linking it to the newly introduced Online Dispute Resolution platform.
Now, the framework for overseeing of Investor complaints shall be undertaken by the Designated Bodies as well (Indian REITs Association, in case of REITs), w.e.f. December 04, 2023.
All entities receiving complaints through the SCORES portal shall resolve the complaint along with the submission of an Action Taken Report (“ATR”) to SEBI within 21 calendar days of such receipt. In case the Complainant is not satisfied with the resolution, it shall be subject to First and Second review by the Designated Body and the SEBI respectively.
Further, in case the complainant opts for Online Dispute Resolution mechanism or other appropriate civil remedies while the complaint is pending on SCORES, the complaint shall be treated as disposed on SCORES.
In conclusion, the regulatory changes in the realm of REITs are ushering in a new era of opportunity and growth for investors and the real estate market alike. As governments worldwide continue to refine and adapt the legal framework surrounding REITs, these investment vehicles are becoming increasingly attractive, not only for large institutions but also for individual investors. These changes not only enhance transparency and governance but also provide a much-needed boost to the real estate sector, enabling it to access a more extensive pool of capital and encouraging sustainable development. As the REIT landscape evolves, it is imperative for both investors and industry professionals to stay well-informed and adapt to these regulatory shifts to make the most of the exciting possibilities that lie ahead. With careful consideration and prudent strategies, the future of REITs seems brighter than ever, offering the potential for steady income, portfolio diversification, and a robust real estate market that can benefit both investors and society as a whole.