Amendments to the Master Circular for REITs: Lock-in Provisions and Follow-on Offers

Introduction:

The Securities and Exchange Board of India (“SEBI”) recently set out the amendments[1] to the Master Circular for Real Estate Investment Trusts (“REITs”) dated May 15, 2024. The amendments address two matters: (A) the review of the lock-in provisions for the preferential issue of units for REITs, and (B) the introduction of guidelines for follow-on offers by publicly offered REITs. The provisions are issued under the powers conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992 and by specific regulations of the SEBI (Real Estate Investment Trusts) Regulations, 2014.

Explanation:

a) Lock-in Provisions for Preferential Issue of Units

In view of Regulation 11(3) of the SEBI (Real Estate Investment Trusts) Regulations, 2014, (“REIT Regulations”) the sponsor(s) and sponsor group(s) are required to hold not less than 15 percent of the total units of the REIT for a period of three years beginning from the date the units are listed in the initial offer.

Previously, the provision contained in Para 10.6.1 of the Master Circular for REITs, dated May 15, 2024, provided for a uniform lock-in period that was based on a division of the total unit capital into two parts. In that arrangement, if the units allotted represented up to 25 percent of the total unit capital, those units were to be locked-in for three years from the date trading approval was granted. Any units in excess of that 25 percent would be locked-in for one year from the same date. The earlier provision also clarified that the units already under lock-in in accordance with Regulation 11(3) should be included in the calculation, with those units not being subject to a new lock-in period.

The revised provision in Para 10.6.1 now lays out a two-part structure for the lock-in period applicable to the units allotted to sponsor(s) and sponsor group(s). Under this new arrangement, 15 percent of the allotted units must remain locked-in for a period of three years from the date when trading approval is granted. The balance of the units allotted to the sponsor(s) and sponsor group(s) will be subject to a lock-in period of one year from the same date. In addition, the sponsor(s) and sponsor group(s) must continue to fulfil the minimum unit-holding conditions as specified in Regulation 11(3) at all times.

Furthermore, a new sub-paragraph, Para 10.6.5, is introduced to allow for the transfer of locked-in units among the sponsor or sponsor group entities. This new provision states that the lock-in period will remain in force with the recipient of any transfer. The recipient entity is not permitted to transfer the units until the original lock-in period has ended. In cases where a REIT has more than one sponsor, the transfer of locked-in units is restricted to within entities that belong to the same sponsor group. In circumstances involving a change of sponsor, the locked-in units of the outgoing sponsor or its group entities may be transferred to the incoming sponsor or its group entities, provided that the recipient continues to meet the minimum unitholding requirement.

b) Guidelines for Follow-on Offer by Publicly Offered REITs

Regulation 14(3) of the REIT Regulations establishes the mechanism for a follow-on offer to raise funds after the issuance of units in the initial public offer (“IPO”). In addition, Regulation 2(1)(n) defines the follow-on offer to include both the public subscription of new units and the sale of REIT units by an existing unit holder.

The guidelines now set out a framework for executing a follow-on offer by a REIT. The framework provides a process that aligns with the structure used for public issues of units and introduces a process designed to expedite fund raising. The REIT is required to pay fees to the Board in accordance with Schedule II of the REIT Regulations at the time of filing either the draft follow-on offer document or the final version. The REIT must also file an application with every stock exchange where its units are listed and select one exchange as the designated stock exchange.

The process mandates that the issuance of units occur solely in dematerialized form. Responsibility for securing the necessary approvals lies with the Manager and the merchant banker(s), who must obtain in-principal approval, as well as final listing and trading approvals from the relevant stock exchange(s). The follow-on offer document must state an amount for general purposes in compliance with sub-regulation (22A) of Regulation 14. Furthermore, a minimum public unitholding of 25 percent of the total outstanding units on a post-issue basis is required.

Additional provisions require that Regulation 15 of the REIT Regulations be applied to the follow-on offer document and to any related advertisements. The allotment and listing of units must adhere to timelines that are equivalent to those specified for the IPO in Chapter 2 of the Master Circular for REITs. In cases where there is a failure to allot or list units, provisions for the payment of interest, as outlined in sub-regulations (20) and (21) of Regulation 14, will apply.

Restrictions are imposed on the further issue of units by a REIT during the period from the filing of the follow-on offer document until the listing of the units or the refund of application monies. The process further includes the submission of a due diligence certificate, executed in the prescribed format using Form A and Form B of Annexure -1, along with the draft follow-on offer document.

Conclusion:

The amendments to the Master Circular for REITs, provide clear directions regarding the lock-in provisions for preferential issues and the procedural framework for follow-on offers by publicly offered REITs. The revised lock-in provisions specify a two-tier structure: fifteen percent of the units remain locked-in for three years, and the balance for one year, subject to ongoing compliance with the minimum unitholding requirement.

[1] https://www.sebi.gov.in/legal/circulars/mar-2025/amendment-to-master-circular-for-real-estate-investment-trusts-reits-dated-may-15-2024_93143.html