Real Estate Investment Trust – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
What is a Real Estate Investment Trust (REIT)? What are the eligibility criteria for granting a certificate to an applicant to act as REIT as per SEBI guidelines in this regard?
Answer:
“REIT” or “Real Estate Investment Trust” shall mean a trust registered as such under Real Estate Investment Trusts (REITs) Regulations, 2014. Any person shall not act as a REIT unless it is registered with SEBI under these regulations. An application for grant of certificate of registration as REIT shall be made, by the sponsor in such form and on such fees as prescribed in these regulations.

Eligibility Criteria for granting a certificate to an applicant to act as REIT as per SEBI guidelines: For the purpose of the grant of certificate to an applicant SEBI shall consider all matters relevant to the activities as a REIT.

Sponsor:
There are not more than 3 sponsors each holding or proposing to hold not less than 5% of the number of units of the REIT on post-initial, offer basis.

The sponsor must have a net worth of at least ₹ 100 Crores on a collective basis and have not less than 5 years’ experience in the real estate industry on an individual basis. However, each sponsor has a net worth of not less than twenty crore rupees and where the sponsor is a developer at least two projects of the sponsor have been completed.

Applicant: Applicant must be a Trust and the Trust deed must be duly registered in India under the provisions of the Registration Act, 1908 containing the main objective as undertaking activity of REIT in accordance with the set Regulations.

Trustee: It should be registered with SEBI under SEBI (Debenture Trustees) Regulations, 1993 not an associate of the sponsor/ manager/principal valuer and the trustee has such wherewithal with respect to infrastructure, personnel, etc. to the satisfaction of SEBI and in accordance with circulars or guidelines as may be specified by SEBI.

Manager: It must have net worth of not less than ? 10 crore not less than 5 years of experience in fund management/advisory services/property management in the real estate industry or in development of real estate and not less than 2 key personnel who each have not less than 5 years of experience in fund management/ advisory services/property management in the real estate industry or in development of real estate.

Multiple Classes: There are no multiple classes of units of REIT.
Preferential Voting of unit holder of REIT: Unit holder of the REIT shall not enjoy preferential voting or any other rights over another unit holder.

Rejection of any previous application by SEBI: Whether any previous application for grant of certificate by the applicant or any related party has been rejected by SEBI.

Disciplinary action has been taken by SEBI: Whether any disciplinary action has been taken by SEBI or any other regulatory authority against the applicant or any related party under any Act or the regulations or circulars or guidelines made there under. Details related to proposed activities: The applicant has clearly described details related to proposed activities at the time of application for registration.

Fit and proper persons: The applicant and parties to the REIT are fit and proper persons based on the criteria as specified in SEBI (Intermediaries) Regulations, 2008.

Question 2.
Who is the sponsor of a Real Estate Investment Trust? What are the provisions with respect to the holding of units by the sponsor in the REIT? Describe.
Answer:
“Sponsor” means any person who sets up the Real Estate Investment Trust (REIT). “Sponsor” appoints the trustee of the REIT in accordance with the SEBI (Real Estate Investment Trust) Regulations, 2014.

Provisions with respect to the holding of units by the sponsor in the REIT:

  • There should not be more than three sponsors each holding at least five per cent of the number of units of the REIT on post -initial offer basis.
  • On a collective basis, the sponsor(s) should have a net worth of not less than one hundred crore rupees and each Sponsor has a net worth of not less than twenty crore rupees.
  • The sponsor or its associate(s) should have not less than five years’ experience in development of real estate or fund management in the real estate industry.
  • Where the sponsor is a developer, at least two projects of the sponsor have been completed.

With respect to holding of units in the REIT, the sponsor(s) shall:

  • Hold the minimum 25% of the total units of the REIT after initial offer on a post-issue basis and this holding shall be held for a period of three years from the date of listing of such units.
  • Any holding of the sponsor exceeding the minimum holding shall be held for a period of at least one year from the date of listing of such units.
  • Together hold not less than fifteen percent of the outstanding units of the REIT at all times.
  • Individually hold not less than five percent of the outstanding units of the listed REIT at all times.

Question 3.
Regulation 11 of SEBI (Real Estate Investment Trust) Regulations, 2014 provides for rights and responsibilities of sponsor(s). Explain.
Answer:
As per Regulation 11 of SEBI (Real Estate Investment Trusts) Regu-lations, 2014 the rights and responsibilities of the sponsor(s) which are as follows:
1. The sponsor(s) shall set up the Real Estate Investment Trusts (REIT) and appoint the Trustee of the REIT.

2. The sponsor(s) shall transfer or undertake to transfer, subject to a binding agreement and adequate disclosures in the initial offer document, their entire shareholding or interest and rights in holding company and/or Special Purpose Vehicle (SPV) or entire ownership of the real estate assets to the REIT prior to allotment of emits of the REIT to the applicants.

Nevertheless, this shall not apply to the extent of any mandatory holding of shares or interest and rights in the holding company and/or SPV by the sponsor(s) and sponsor group(s) as required under any Act or regulations or circulars or guidelines of government or regulatory authority as specified from time to time.

3. With respect to holding of units in the REIT:
(a) Sponsor shall collectively hold a minimum of twenty five per cent of the total units of the REIT after initial offer on a post-issue basis; However, the minimum sponsor(s) holding specified in this clause shall be held for a period of atleast three years from the date of listing of such units. Further, any holding of the sponsor(s) exceeding the minimum holding as specified in this clause, shall be held for a period of atleast one year from the date of listing of such units;

(b) Sponsor(s) together hold not less than fifteen per cent of the outstanding units of the listed REIT at all times;

(c) Each of the sponsor individually shall hold not less than five per cent of the outstanding units of the listed REIT at all times.

4. If the sponsor(s) propose(s) to sell its units below the limit specified in (b) or (c) of Point No. 3 as mentioned above:
(a) Such unit shall be sold only after a period of 3 years from the date of listing of the units.

(b) Prior to sale of such units, the sponsor(s) shall arrange for another person(s) or entity(ies) to act as the re-designated sponsor(s) where the re-designated sponsor shall satisfy the eligibility norms for the sponsor as specified under the SEBI REIT Regulations. However, such units’ may also be sold to an existing sponsor.

(c) The proposed re-designated sponsor shall obtain approval from the unit holders or provide option to exit to the unit holders in accordance with guidelines as may be specified. However, this clause shall not apply where the units are proposed to be sold to an existing sponsor or member of sponsor group.

5. If re-designated sponsor(s) proposes to sell its units to any other person, condition specified in (a), (b) & (c) of point No. 4 as mentioned above shall be complied with.

Question 4.
Explain the terms ‘Strategic Investor’ with reference to the public issue of REITs and InVITs.
Answer:
‘Strategic investor’ means:

  • An infrastructure finance company registered with RBI as a NBFC
  • A Scheduled Commercial Bank.
  • An international multilateral financial institution.
  • A systemically important NBFC with RBI.
  • A foreign portfolio investors

who invest either jointly or severally not less than 596 of the total offer size of the InvIT or such amount as may be specified by SEBI with applicable provisions of the FEMA Act, 1999 and the rules or regulations or guidelines made there under.

Participation by the ‘strategic investors’ in the public issue of the REITs also cover following aspects:

Requirements
Holding by strategic investors –

  • Minimum 5%.
  • Maximum 25%.

Holding by public, other than strategic investors and sponsors:

  • Minimum 25%.

Holding by sponsor:

  • Minimum 5%.
  • Maximum 70%.

Issue price of the units and utilisation of funds:

  • The price at which units are offered to the strategic investors must not be less than the price determined in the public issue.
  • It must be ensured that the subscription amount is kept in the separate account until the public issue is opened.

Lock-in-period:
The units subscribed by strategic investors pursuant to the unit subscription agreement will be locked-in for a period of 180 days from the date of listing in the public issue

Question 5.
Discuss five salient features of SEBI (REIT) Regulations, 2014?
Answer:
Five salient features of SEBI (REIT) Regulations, 2014 are as follows:
1. Parties to the REITs: Sponsor Group, Re-designated Sponsor, Manager and Trustee.

2. Eligibility for Trustee: Shall be registered as a Trustee under SEBI (Debenture Trustee) Regulations, 1993 and shall not be an associate of Sponsor/Manager/principle valuer.

3. Investment conditions: At least 80% of the value of the REIT assets needs to be in completed and revenue generating properties.

4. Governing Code: SEBI (Real Estate Investment Trusts) Regulations, 2014.

5. Maximum number of sponsors that REITs can have & Unit holding obligation:

  • Each sponsor shall hold or propose to hold minimum 5% of units of REITs.
  • Collectively to hold minimum of 25% of the units of the REIT for a period of not less than 3 years from the date of listing.
  • Sponsor(s) and sponsor group(s) together hold not less than fifteen per cent of the outstanding units of the listed REIT at all times.

Question 6.
Write short note on: “Rights and Meetings of the Unit holders in REITs”.
Answer:
“Rights and Meetings of the Unit holders in REITs”:

  •  The “unit holder” shall have the rights to receive income or distributions as provided for in the Offer document/trust deed.
  • In respect to any matter requiring approval of the unit holders:
    • Resolution shall be considered as passed when the votes cast by unit holders, so entitled and voting, in favour of the resolution exceed a certain percentage, as specified in this regulation, of the votes cast against.
    • Voting may also be done by postal ballot or electronic mode.
    • Notice of not less than 21 days either in writing or through elec-tronic mode shall be provided to the unit holders.
    • Voting by any person who is a related party in such transaction as well as associates of such person(s) shall not be considered on the specific issue.
    • Manager shall be responsible for all the activities pertaining to conducting of meeting of the unit holders, subject to overseeing by the trustee.

However, in case of issues pertaining to manager such as change in manager including removal of the manager or change in control of the manager then trustee shall convene and handle all activities pertaining to conduct of the meetings.

Also, in case of issues related to trustee such as change in the trustee, the trustee shall not be involved in any manner in the conduct of the meeting.

  • An annual meeting of all unit holders shall be held not less than once a year within 120 days from the end of financial year and the time between two meetings shall not exceed 15 months.
  • With respect to the annual meeting of unit holders:
  • Any information which is required to be disclosed to the unit holders and any issue, in the ordinary course of business, may require approval of the unit holders may be taken up in the meeting including:
    • Latest annual accounts and performance of the REIT.
    • Approval of auditor and fees of such auditor, as may be required.
    • Latest valuation reports.
    • Appointment of valuer as may be required.
    • Any other issue.
  • For any issue taken up in such meetings which require approval from the unit holders, votes cast in favour of the resolution shall be more than the votes cast against the resolution.

Question 7.
For the purpose of participation by the “Strategic Investors” in the Public Issue of the REITs; discuss the provisions regarding:
1. Holding requirements.
2. Lock-in Period.
Answer:
For the purpose of participation by the “Strategic Investors” in the Public Issue of the REITs, following are the provisions: i. Holding requirements:

  • Holding by strategic investors :
    • Minimum 5%.
    • Maximum 25%.
  • Holding by public, other than strategic investors and sponsors:
    • Minimum 25%.
  • Holding by sponsor:
    • Minimum 5%.
    • Maximum 70%

2. Lock-in Period: The units subscribed by strategic investors pursuant to the unit subscription agreement will be locked-in for a period of 180 days from the date of listing in the public issue.

Question 8.
Briefly explain provisions of mandatory registration of real estate investment trusts as per SEBI (Real Estate Investment Trusts) Regulations, 2014.
Answer:
Registration as per SEBI (Real Estate Investment Trusts) Regulations, 2014: As per Regulation 3 of SEBI (Real Estate Investment Trusts) Regulations, 2014:

  • No person shall act as a REIT unless it is registered with the Board under these regulations.
  • An application for grant of certificate of registration as REIT shall be made by the sponsor in Form A as specified in Schedule I to these regulations. It shall be accompanied by a non-refundable application fee of such amount. It shall be payable in the manner as specified in Schedule II to these regulations.

Question 9.
What are the rights and responsibilities of Trustee?
Answer:
“Rights and Responsibilities of Trustee”: As per Regulation 9 of SEBI (REIT) Regulations, 2014, prescribes the rights and responsibilities of a Trustee of a REIT are:

  • The Trustee shall hold the REIT assets in trust for the benefit of the unit holders.
  • The Trustee shall enter into an investment management agreement with the mEmager on behalf of the REIT.
  • The trustee shall oversee activities of the manager in the interest of the unit holders, and shall obtain compliance certificate from the manager in the form as may be specified on a quarterly basis.
  • The trustee shall ensure that the manager complies with the reporting and disclosures requirements in these regulations and in case of any delay or discrepancy require the manager to rectify the same on an urgent basis.
  • The trustee shall review the transactions carried out between the manager and its associates and where the manager has advised that there may be a conflict of interest, shall obtain confirmation from a practising chartered accountant or a valuer as applicable that such transaction is on arm’s length basis.
  • The trustee shall make distributions and ensure that the manager makes timely declaration of distributions to the unit holders.
  • The trustee may require the manager to set up such systems and submit such reports to the trustees as may be necessary for effective monitoring of the performance and functioning of the REIT.
  • The trustee shall ensure that subscription amount is kept in a separate bank account in name of the REIT and is only utilized for adjustment against allotment of units or refund of money to the applicants till the time such units are listed.
  • The trustee shall ensure that the remuneration of the valuer is not linked to or based on the value of the asset being valued.
  • The trustee shall ensure that the manager convenes meetings of the unit holders in accordance with these regulations and oversee the voting by unit holders and declare outcome of the voting.
  • The trustee may take up with SEBI or with the designated stock exchange, any matter which has been approved in an annual meeting or special meeting, if the matter requires such action.
  • The trustee shall provide to SEBI and to the designated stock exchange such information as may be sought by SEBI or by the designated stock exchange pertaining to the activity of the REIT.
  • The trustee shall obtain prior approval from the unit holders in accordance with these regulations and from SEBI in case of change in control of the manager.
  • The trustee of the REIT shall not invest in units of the REIT in which it is designated as the trustee.
  • The trustee shall ensure that the activity of the REIT is being operated in accordance with the provisions of the trust deed, the offer document and if any discrepancy is noticed shall inform the same to SEBI immediately in writing.

Question 10.
What are the requirements for offer document and its advertisements by the REIT?
Answer:
Requirements for offer document and its advertisements by the REIT:
As per the provisions of Regulation 15 of SEBI (REIT) Regulations, 2014, the requirements for offer document of the REIT and its advertisements are as discussed below:

Offer Document:

  • The offer document of the REIT shall contain material, true, correct and adequate disclosures to enable the investors to make an informed decision.
  • The offer document shall:
    • include all information as specified in Schedule- in to these regulations or as specified in any circulars or guidelines issued by the Board in this regard.
    • not be misleading and not contain any untrue statements or mis-statements.
    • not provide for any guaranteed returns to the investors.
    • include such other disclosures as may be specified by the Board.

Advertisement:

  • Any advertisement material relating to any issue of units of the REIT shall not be misleading and shall not contain anything ex-traneous to the contents of the offer document.
  • If an advertisement contains positive highlights, it shall also contain risk factors with equal importance in all aspects including print size.
  • The advertisements shall be in accordance with the offer document and any circulars or guidelines as may be specified by the Board in this regard.

Question 11.
What are the requirement for listing and trading of units REIT?
Answer:
Requirement for listing and trading of units REIT:
As per Regulation 16 of SEBI (REIT) Regulations, 2014 following are the requirements; namely:

  • It shall be mandatory for all units of REITs to be listed on a recognized stock exchange having nationwide trading terminals within a period of twelve working days from the date of closure of the offer after the initial offer.
  • The listing of the units of the REIT shall be in accordance with the listing agreement entered into between the REIT and the designated stock exchange.
  • The units of the REIT listed in recognized stock exchanges shall be traded, cleared and settled in accordance with the bye-laws of con-cerned stock exchanges and such conditions as may be specified by the Board.
  • Trading lot for the purpose of trading of units of the REIT shall be INR 1 lakh.
  • REIT shall redeem units only by way of a buy-back or at the time of delisting of units.
  • Units of REIT shall be remain listed on the designated stock exchange unless delisted.
  • Minimum public holding for the units of the listed REIT shall be 25% the total number of outstanding units at all times and the number of unit holders of the REIT forming part of the public shall be 200 at all times. If failed action may be taken as may be specified by the Board and by the designated stock exchange including delisting of units.
  • Any person other than the sponsor(s) holding units of the 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 the Board.
  • The Board and designated stock exchanges may specify any other requirements pertaining to listing and trading of units of the REIT by issuance of guidelines or circulars.

Question 12.
In what conditions the manager shall apply for delisting of units of REITs to SEBI and to the designated stock exchanges. Discuss those conditions?
Answer:
The manager shall apply for delisting of units of the REIT to SEBI and the designated stock exchanges if:

  • There are no projects or assets remaining under the REIT for a period exceeding six months and REIT does not propose to invest in any project in future. The extension is granted by further six months with the approval of unit holders in the manner as specified in REIT Regulations.
  • The public holding falls below the specified limit as prescribed under REIT Regulations.
  • SEBI or the designated stock exchanges require such delisting for violation of the listing agreement or these regulations or the Act.
  • SEBI or the designated stock exchanges require such delisting for violation of the listing agreement, these regulations or the Act or in the interest of the unit holders.
  • The unit holders may also apply for such delisting in accordance with the provisions as prescribed for rights and meeting if unit holders.
  • The sponsor(s) or trustee requests such delisting and such request has been approved by unit holders in accordance with the REIT Regulations.

Corporate Funding and Listings in Stock Exchanges Notes