Article
June 17, 2024
Navigating the Regulatory Landscape: Small and Medium REITs' Path to Compliance and Growth
-
On March 08, 2024, SEBI notified amendments to the SEBI (Real Estate Investment Trusts) Regulations, 2014 vide the SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024.
-
In a significant change, SEBI has permitted the establishment of SM REITs, having an asset value of at least INR 25 crores (Indian Rupees twenty-five crores), compared to the minimum asset value of INR 500 crores (Indian Rupees five hundred crores) required for existing REITs.
-
The amendment is expected to initiate a growth pattern to encourage investors to invest in REITs, with a decreased threshold and increased viability of options.
Overview
Over the past 2-3 years, fractional ownership
has become increasingly popular in India. Fractional
ownership is a method of property ownership where
multiple unrelated parties can share in, and mitigate
the risks of, ownership of a high-value asset. Investors
who were unable to buy the whole property due to
cash limitations could invest in real estate properties
via fractional ownership. However, without proper
regulations and governance, there was always a question
whether such fractional ownership of investments
was safe.
The Securities and Exchange Board of India (“SEBI”)
issued a consultation paper1 on May 12,
2023, titled ‘Regulatory Framework For Micro,
Small & Medium REITs (MSM REITs)’ laying
down a proposed regulatory framework for Small and
Medium Real Estate Investment Trusts (“SM
REITs”) which would make real estate
investment more accessible and facilitate fractional
ownership platforms (“FOPs”)
to be governed under the ambit of SEBI (Real Estate
Investment Trusts) Regulations, 2014 (“REIT
Regulations”), (“Consultation
Paper”). Our detailed analysis of
the Consultation Paper can be accessed
here.
In a board meeting conducted on November 25,
20232, SEBI approved amendments to the
REIT Regulations paving way for a regulatory framework
for facilitation of Small and Medium REITs (“SM
REITs”). The amendments were notified
vide the SEBI (Real Estate Investment Trusts)
(Amendment) Regulations, 2024 on March 08, 20243
(“Amended Regulations”).
Amendments
-
Definition
and conditions on asset value of the SM REIT
The acceptance of the introduction of a new asset
class has led to a change in the definition of Real
Estate Investment Trust (“REIT”)
in the REIT Regulations.
REIT has been defined to means a person that
pools INR 50 crores or more for the purpose of issuing
units to at least 200 investors so as to acquire
and manage real estate asset(s) or property(ies),
that would entitle such investors to receive the
income generated therefrom without giving them the
day-to-day control over the management and operation
of such real estate asset(s) or property(ies). Further,
the term REIT shall include SM REITs4
as defined in the Amended Regulations.
As per the Amended Regulations, SEBI has permitted
the establishment of SM REITs, having an asset value
of at least INR 25 crores (Indian Rupees twenty-five
crores), compared to the minimum asset value of
INR 500 crores (Indian Rupees five hundred crores)
required for existing REITs. The minimum number
of members for the SM REITs shall continue to be
200 investors (other than investment manager).
However, Amended Regulations clarifies that any
company which acquires and manages real estate asset(s)
or property(ies) and offers or issues securities
to the investors, shall not be deemed to be construed
as a REIT under the REIT Regulations.
-
Structure and
Parties to the REIT
The SM REITs are to be set up as a trust and
the trust deed shall be required to be registered
under the provisions of Registration Act, 1908.
The main objective of the trust deed should be to
undertake the activity of SM REIT through one or
more schemes in accordance with the Amended Regulations.
A Special Purpose Vehicle (“SPV”)
will be a company which is wholly owned subsidiary
of the scheme of the SM REIT. The SM REITs shall
be required to exercise absolute control and hold
100% (one hundred percent) stake in the shareholding
of the SPV. Further, the ownership and control of
the underlying properties to the SM REITs shall
be vested in the SPV.
As part of the structure, the investor / applicant
shall be required to appoint a trustee (who is registered
with SEBI under SEBI (Debenture Trustees) Regulations,
1993) for the SM REITs. The trustee, in turn, will
have the power to appoint such investor / applicant
as the investment manager of the SM REIT by entering
into an investment management agreement with the
trustee of the SM REIT5.
The investment manager shall mean a company incorporated
in India, which sets up the SM REIT, manages assets
and investments of the SM REIT and undertakes operational
activities of the SM REIT. The minimum net worth
requirement for the investment manager shall be
at least INR 20 crores (Indian rupees twenty crores),
out of which at least INR 10 crores (Indian Rupees
ten crores) should be in the form of liquid assets.
The investment manager for the SM REITs may also
act as the sponsor, and is required to have prior
experience of at least 2 (two) years in the real
estate industry and/or fund management in real estate
(subject to certain exceptions6). Further,
at least half of the directors of the investment
manager should be independent and are not directors
of the manager or investment manager of another
SM REIT.. If such an investment manager is not able
to meet the requirement of prior 2 (two) years,
they are required to appoint 2 (two) key managerial
personnel, with not less than 5 (five) years’
experience each in the real estate industry and/or
real estate fund management.
There are additional guidelines on the minimum
unit holding for Investment Managers, which is as
follows7:
|
S. No.
|
Time Period
from initial listing of scheme’s
units
|
Minimum Unitholding
of Investment Manager
|
|
1.
|
0-3 years
|
(a) in a scheme
with no leverage as per disclosures
in the scheme offer document for initial
offer - 5% of the total outstanding
units of the scheme
(b) in a scheme with
leverage as per disclosures in the scheme
offer document for initial offer - 15%
of the total outstanding units of the
scheme
Holding of the investment manager
in excess of minimum 5% or 15% of total
outstanding units shall be held for
at least 1 year (from the date of listing
of units issued in the initial offer).
|
|
2.
|
Up to 5 years
|
5% of the total outstanding
units of the scheme
|
|
3.
|
6-10 years
|
3% of the total outstanding
units of the scheme
|
|
4.
|
11-20 years
|
2% of the total outstanding
units of the scheme
|
|
5.
|
Post 20 years
|
1% of the total outstanding
units of the scheme
|
-
Other Key Conditions
- Mandatory listing
In order to ensure a wider scope of participation
from the investors in SM REITs, and to ensure that
ample exit rights are provided to the unitholders,
the SM REITs are proposed to be mandatorily listed
on a recognized stock exchange.
The SM REIT shall be permitted to launch schemes
and the units of each scheme shall be in dematerialized
form. The minimum offer and allotment to the public
in each scheme of SM REIT shall be at least 25%
(twenty five percent) of the total outstanding units
of such scheme. The minimum price of each unit of
the scheme of the SM REIT shall be INR 10 lakhs
(Indian Rupees ten lakhs) or such other amount as
may be specified by SEBI.
- Investment conditions
Each scheme should invest at least 95% (ninety-five
percent) of its assets in completed and revenue-generating
properties. An SM REIT is not permitted to invest
in under-construction or non-revenue generating
real estate. Further, each scheme can invest up
to 5% (five percent) of the scheme's assets in unencumbered
liquid assets.
The SPV must solely own all assets acquired or
intended to be acquired by the SM REIT scheme, as
it is a wholly owned subsidiary of the REIT. Additionally,
the scheme is prohibited from lending to any entity
except its own SPV, and the SPV itself is not allowed
to lend to any entity8.
- Valuation
The investment manager of the SM REIT must ensure
annual comprehensive valuations of each scheme's
assets by a qualified, independent valuer and submit
such report within two months after the financial
year ends to the investment manager.
If significant events impact asset values, a
fresh valuation must be done within 2 (two) months
from the date of such event. The valuer must have
at least 5 (five) years of real estate valuation
experience and must not be affiliated with the investment
manager or trustee. Valuations must include physical
property inspections and adhere to specified disclosures.
Any property acquisitions or sales require a full
valuation, and the same valuer cannot reassess an
asset within 12 (twelve) months of acquisition,
unless involved in its initial valuation.
Prior to any issue of units to the public and
any other issue of units, the valuer shall undertake
full valuation of all the REIT assets and include
a summary of the report in the offer document. The
valuation report cannot be more than six months
old from the date of such issuance.
- Distributions
The investment manager of the SM REIT must ensure
that at least 95% (ninety-five percent) of the SPV's
net distributable cash flows must be distributed
to the SM REIT scheme, subject to adherence to the
Companies Act, 2013, with retained amounts used
as specified by SEBI.
Each scheme must distribute 100% (one hundred
percent) of its net distributable cash flows to
unit holders. Distributions must be declared at
least once in a quarter within fifteen working days
from the end of a quarter, and paid to unit holders
within seven working days from the date of such
declaration. If payments are delayed, the investment
manager shall be liable to pay 15% (fifteen percent)
annual interest for the delayed period, without
recovering this excess interest from the SM REIT.
- Mode of funding
The SM REIT scheme can raise funds from both
Indian and foreign investors through unit issuance,
with foreign investments subject to guidelines from
the Reserve Bank of India and the Government of
India. If leverage is disclosed in the scheme's
initial offer document, both the scheme and its
SPVs may undertake leverage.
The scheme must raise capital by issuing units
specific to the scheme, and if leveraging, it may
do so through borrowings or debt securities issuance
under SEBI regulations. SPVs shall raise capital
from equity investment from the SM REIT scheme and
may borrow from the scheme. For schemes that have
opted for leveraging, the SPV of the scheme may
also undertake external borrowings or issue debt
securities under applicable SEBI regulations.
The total borrowings and deferred payments, net
of cash equivalents at the scheme level, shall not
exceed 49% of the scheme's asset value. If these
exceed 25% (twenty five percent) of the value of
the scheme, then for further borrowings a credit
rating from a SEBI-registered agency and approval
from unit holders as specified in Amended Regulations
shall be required.
- Taxation
The Income Tax Act has set out a special regime
for taxation of income arising through a ‘Business
Trust’ (which includes REITs and SM REITs)
and its unitholders under Chapter XII-FA of the
Income-tax Act, 1961.
- Migration
Applicants can apply for the registration of
existing entities or structures owning real estate
assets as SM REITs as of the notification date of
the Amended Regulations within 6 (six) months of
this date or within a timeframe specified by SEBI.
For migration under the Amended Regulations,
the applicants must include details of the existing
entities or structures and a migration plan with
their registration application. The migration must
be completed within 6 (six) months of receiving
registration or as specified by the Board.
-
Differences
from the consultation paper
Some of the provisions set forth in the Consultation
Paper to be implemented on the SM REITs schemes,
were not notified in the regulatory framework for
SM REITs introduced in the board meeting held on
November 25, 2023 as well as the Amended Regulations.
Some of these are as follows -
the SM REITs scheme shall raise
funds from at least 20 (twenty) investors that are
unrelated to the sponsor, its related parties and
its associates; maximum subscription from any investor
cannot be more than 25% (twenty-five percent) of
the total unit capital; the Amended Regulations have done
away with the requirement of appointment of two
separate individuals as the sponsor and the investment
manager respectively; and the Consultation Paper provided
for the minimum net worth of the investment manager
to be not less than INR 10 crores (Indian rupees
ten crores) while the Amended Regulations prescribe
for the net worth to be not less than INR 20 crores
(Indian rupees twenty crores).
Conclusion
The introduction of SM REITs into the REIT Regulations
has come in as an awaited and welcome change in
the industry. The scheme is expected to initiate
a growth pattern to encourage investors to invest
in REITs, with a decreased threshold and increased
viability of options. However, as is said that each
coin has two sides, we understand the limitations
may lead to several hinderances and the prescribed
migration of the existing REITs under the framework
to SM REITs may be a path of hurdles. We await the
implementation of the scheme to see the impact on
the industry further.
Authors:
-
Palomita Sharma,
Sapna Kataria and
Khyati Dalal
M&A and PE Team:
Nishith Desai, Global Business Strategy
Vaibhav Parikh, Co-Head, M&A and PE
Nishchal Joshipura, Co-Head, M&A and PE
Ratnadeep Roychowdhury, Co-Head, M&A and PE
Harshita Srivastava, Co-Head, M&A and PE
Huzefa Tavawalla, Co-Head, M&A and PE
You can direct your queries or comments to the relevant member.
1SEBI, Regulatory Framework For Micro,
Small & Medium REITs (MSM REITs), May 12, 2023,
available at:
https://www.sebi.gov.in/reports-andstatistics/reports/may-2023/regulatory-framework-for-micro-small-and-medium-reits-msm-reits-_71149.html.
2SEBI, Board Meeting, November 25,
2023, available at:
https://www.sebi.gov.in/media-and-notifications/press-releases/nov-2023/sebi-board-meeting_79337.html.
3SEBI, Securities and Exchange Board
of India (Real Estate Investment Trusts) (Amendment)
Regulations, 2024, March 08, 2024, available at
https://www.sebi.gov.in/legal/regulations/mar-2024/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-march-8-2024-_82430.html.
4SEBI, Facilitation of Micro Small &
Medium REITs - Amendments to SEBI (Real Estate Investment
Trusts) Regulations, 2014 for creation of new regulatory
framework, November 25, 2023, available at
https://www.sebi.gov.in/sebi_data/meetingfiles/nov-2023/1701238466470_1.pdf.
5Regulation 4(2)(e)(v), Securities
And Exchange Board of India (Real Estate Investment
Trusts)(Amendment) Regulations, 2024, available
at
https://www.sebi.gov.in/legal/regulations/mar-2024/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-march-8-2024-_82430.html.
6Regulation 26J of SEBI, Securities
And Exchange Board Of India (Real Estate Investment
Trusts)(Amendment) Regulations, 2024, available
at
https://www.sebi.gov.in/legal/regulations/mar-2024/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-march-8-2024-_82430.html.
7SEBI, Facilitation of Micro Small &
Medium REITs (“MSM REITs”) - Amendments
to SEBI (Real Estate Investment Trusts) Regulations,
2014 (“REIT Regulations”) for creation
of new regulatory framework, November 25, 2023,
available at
https://www.sebi.gov.in/sebi_data/meetingfiles/nov-2023/1701238466470_1.pdf.
8Regulation 18(4)(13), Securities
And Exchange Board of India (Real Estate Investment
Trusts)(Amendment) Regulations, 2024, available
at
https://www.sebi.gov.in/legal/regulations/mar-2024/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-march-8-2024-_82430.html.
Disclaimer
The contents of this hotline should
not be construed as legal opinion. View detailed disclaimer.
This hotline does not constitute a legal
opinion and may contain information generated using
various artificial intelligence (AI) tools or assistants,
including but not limited to our in-house tool,
NaiDA. We strive to ensure the highest quality and
accuracy of our content and services. Nishith Desai
Associates is committed to the responsible use of AI
tools, maintaining client confidentiality, and adhering
to strict data protection policies to safeguard your
information.
This hotline provides general information
existing at the time of preparation. The Hotline is
intended as a news update and Nishith Desai Associates
neither assumes nor accepts any responsibility for any
loss arising to any person acting or refraining from
acting as a result of any material contained in this
Hotline. It is recommended that professional advice
be taken based on the specific facts and circumstances.
This hotline does not substitute the need to refer to
the original pronouncements.
This is not a spam email. You have received
this email because you have either requested for it or
someone must have suggested your name. Since India has
no anti-spamming law, we refer to the US directive,
which states that a email cannot be considered spam if
it contains the sender's contact information, which
this email does. In case this email doesn't concern you,
please
unsubscribe from mailing list.
 |
|
We aspire
to build the next generation
of socially-conscious lawyers
who strive to make the world
a better place.
At NDA, there
is always room for the right
people! A platform for self-driven
intrapreneurs solving complex
problems through research, academics,
thought leadership and innovation,
we are a community of non-hierarchical,
non-siloed professionals doing
extraordinary work for the world’s
best clients.
We welcome
the industry’s best talent -
inspired, competent, proactive
and research minded- with credentials
in Corporate Law (in particular
M&A/PE Fund Formation),
International Tax , TMT and
cross-border dispute resolution.
Write to
happiness@nishithdesai.com
To learn more
about us
Click here.
|
|
Chambers
and Partners Asia
Pacific 2024:
Top Tier for Tax,
TMT, Employment,
Life Sciences, Dispute
Resolution, FinTech
Legal
Legal 500
Asia Pacific 2024:
Top Tier for Tax,
TMT, Labour &
Employment, Life
Sciences & Healthcare,
Dispute Resolution
Benchmark
Litigation Asia
Pacific 2023:
Top Tier for Tax,
Labour & Employment,
International Arbitration
AsiaLaw
Asia-Pacific 2023:
Top Tier for Tax,
TMT, Investment
Funds, Private Equity,
Labour and Employment,
Dispute Resolution,
Regulatory, Pharma
IFLR1000
2024: Top
Tier for M&A
and Private Equity
FT Innovative
Lawyers Asia Pacific
2019 Awards:
NDA ranked 2nd in
the Most Innovative
Law Firm category
(Asia-Pacific Headquartered)
RSG-Financial
Times:
India’s Most
Innovative Law Firm
2019, 2017, 2016,
2015, 2014
|
|
|
|
