SM REITs

On March 8, 2024, the Securities and Exchange Board of India (“SEBI”) brought in an amendment to the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“SEBI REIT Regulations”) to introduce a framework for Small and Medium Real Estate Investment Trusts (“SM REITs”).

The Amendment

The revised definition of a Real Estate Investment Trust (“REIT”) specifies it as an entity that aggregates a minimum of INR 50 crores, intending to issue units to a minimum of 200 investors. The aim is to procure and oversee real estate assets, granting investors the right to benefit from generated income while maintaining their daily involvement in managing these assets. This definition encompasses SM REITs. Notably, companies engaging in real estate asset management and securities issuance to investors do not fall under the REIT classification.

Additionally, the amendment to the SEBI REIT Regulations has seen the insertion of a new chapter, Chapter VI-B, to lay down the framework for the same. This framework consists of the following:

Applicability, Registration, and Eligibility

• The SEBI REIT Regulations apply to SM REITs except for chapters II, IV, V and Regulation 22.
• Regulation 26H provides for various definitions concerning SM REITs such as investment manager, liquid net worth, SM REIT etc.
• To register an SM REIT, an application for a grant of certificate of registration is required as per Form-A specified under Schedule IA with the application fee.
• Regulation 26J provides for an eligibility criterion for the trust to be an SM REIT which includes requirements such as having a registered trust deed under the Registration Act, 1908, specific qualifications for an investment manager etc.
• Regulation 26L details the procedure for the grant of a certificate of registration and Regulation 26M provides for the conditions for the grant of the same such as the SM REIT is required to make an initial offer of a scheme within 3 years from the date of registration with SEBI. The period for issuing the same is for 30 days, only in dematerialized form.
• The regulations also allow for the migration of existing persons, entities, and structures under the current regulations.
• Regulation 26P outlines the eligible issuers, who can make an initial offer of units under a scheme.

Merchant Banker Requirements

• SM REITs must appoint a merchant banker. Merchant bankers must maintain final books of demand and records of the book-building process. SEBI may inspect these records as necessary. Post-issue merchant bankers are responsible for various post-issue activities, including monitoring investor grievances and ensuring the timely release of relevant advertisements.
• Regulation 26R provides for conditions for the initial offer of an SM REIT to entail detailing assets in the draft offer document filed with the regulatory Board via a merchant banker. Each scheme must have a minimum unit price and distinct name, with assets worth at least INR 50 crore. Managers and trustees must segregate and safeguard assets and documents. The offer document is made public for feedback before launch. Disclosures must provide accurate information without guarantees.

Ownership and Funding

• The Special Purpose Vehicle (“SPV”) is required to own all the assets under the SM REIT. 95% of the scheme’s assets must be invested in completed, revenue-generating properties, with the remainder in unencumbered liquid assets. The REIT is prohibited from lending to entities outside its SPV, and the SPV itself cannot lend to any entity.
• SM REITs can raise funds from both Indian and foreign investors via unit issuance. Leverage may be undertaken if disclosed in the initial offer document. Similarly, the SPV of the SM REIT may raise capital through equity investment from the REIT scheme or borrowings.
• If leveraging is opted for, SPVs may utilize external borrowings or debt securities issuance. However, total borrowings at the scheme level must not exceed 49% of scheme assets, with credit ratings required for borrowings exceeding 25%, alongside unit holder approval.

Investment Manager Obligations

• The investment manager allocates units to applicants upon receipt of the application sum. The basis of allotment is finalized fairly and properly by authorized representatives, post-issue merchant bankers, and registrars.
• They are also required to ensure the calculation of the annual comprehensive valuation of each SM REIT scheme’s assets within 2 months after the financial year ends. Valuers must have at least 5 years of real estate valuation experience and must not be associated with the investment manager or trustee.
• Furthermore, they are required to ensure that at least 95% of the net distributable cash flows of the SPV are distributed to the SM REIT scheme, and 100% of the scheme’s net distributable cash flows are distributed to unit holders. Distributions must be declared quarterly and paid within 7 working days.
• The investment manager must follow SEBI guidelines for resolving investor grievances, including depositing required amounts with designated bodies.
• Regulation 26Y mandates that the investment manager of SM REIT is required to use the book-building platform of the designated stock exchange to accept bids from investors.
• No person involved with the SM REIT unit issue can offer any form of incentive to applicants, except for fees or commissions for related services.
• The investment manager must maintain specific unit holdings for set periods after the listing of units in the initial offer. Holdings must be unencumbered and locked in.
• Additionally, units issued against securities swaps before the implementation of these regulations would not count toward the total outstanding units for these requirements.

Unit Holder Rights and Obligations

• Units of the SM REIT scheme must be listed on recognized stock exchanges with nationwide trading terminals within specified timelines. Failure to meet these timelines results in a 15% per annum interest payment to investors by the investment manager.
• At least 25% of outstanding units in each SM REIT scheme must be offered and allotted to the public.
• Delisting may occur if public unit holdings fall below specified limits, projects/assets are absent for an extended period, or due to regulatory violations per Regulation 26ZI.
• SM REITs cannot engage in transactions with related parties except for payment of fees to the investment manager and trustee.
• Unit holders have the right to receive distributions and vote on various matters. Meetings must be conducted per specified procedures, and certain resolutions require a specific percentage of votes for approval.

Looking Forward

The introduction of SM REITs framework by SEBI marks a significant step in expanding real estate investment opportunities. With a tailored framework, investors can expect transparency, accessibility, and efficiency. Rigorous eligibility criteria and regulatory oversight ensure stability and integrity. Obligations on stakeholders ensure investor protection and fair practices. SM REITs offer diverse investment options and potential returns. Successful implementation can stimulate investment, promote growth, and enhance India’s real estate market reputation.

Co- Authored by – Krishnan Sreekumar