In a bid to ensure pro-rata rights to all unit holders, the Securities & Exchange Board of India (Sebi) has allowed investors holding 10% or more of the total outstanding units of the InvIT or REIT, either individually or collectively, to nominate representatives to the board of the investment manager.
The move, according to experts, is likely to help strengthen governance norms of these business trusts and improve transparency in their management.
“As InvITs and REITs are garnering interest from pedigreed long-term investors, the regulation changes approved by Sebi will ensure that the instruments continue to evolve and remain attractive to global investors…,” said Srishti Ahuja, partner, investment banking, EY India. “Allowing board nomination rights to investors, individually or collectively, holding more than 10% stake will strengthen the governance framework and allow for investors to play a more active oversight role.”
While the move is expected to offer a level-playing field to retail investors, it comes with accountability through the principles of Stewardship Code, which will be applicable for all such unit holders.
“Significant powers are given to the unit holders, along with that the responsibility is also casted on nominating unit holders by implementing the Stewardship Code,” said Makarand Joshi, founding partner of corporate compliance firm MMJC & Associates. “The proposal seems to be a balancing proposition in such a way that on the one hand they are given powers to participate in decision-making but on other hand they are also held accountable.”The unit holders are getting a big power to nominate a director to the board of the investment management. However, the requirement of adopting the Stewardship Code is the beginning of casting fiduciary responsibility on investors. Generally, the director holds a fiduciary position and not investors, said Joshi.Sebi has also changed the minimum unit holding requirement for sponsors of REITs and InvITs. Currently, the regulation mandates the sponsor to hold a minimum of 15% units for a period of at least three years from the date of listing of units. It has now been changed to a certain minimum unit holding on a reducing scale for the entire life of the REIT or InvIT.
The mandatory minimum unit-holding also needs to be locked in and be unencumbered.
Similarly, allowing for a self-sponsored investment manager creates an interesting entry point for new fund managers and a feasible exit option, said EY’s Ahuja.
According to her, in the long run, these instruments need a framework that is conducive to mergers and acquisitions, reorganisations, sophisticated governance frameworks and fundraising structures. The regulations need to allow for them if these are value accretive for unit holders.
The government and Sebi have been making efforts to make REITs and InvITs popular by introducing regulations at par with the global standards.
Sebi has undertaken many initiatives, including reduction in the perpetual lock-in requirement for the sponsor to align it with those applicable for IPOs and flexibility for change in REITs and InvITs’ sponsors.
It has also reduced the size of trading lots to enhance liquidity and made provisions for enabling further capital raising in REITs, which will prompt growth.
REITs and InvITs are relatively new investment instruments in the Indian context, but are popular in global markets, given their stable returns to investors through rental income from a portfolio of stabilised commercial properties.
While a REIT comprises a portfolio of rent-yielding commercial real assets, a major portion of which is already leased out, InvITs comprise a portfolio of infrastructure assets such as highways and power-transmission assets.
