Jurisdiction - India
Reports and Analysis
India – Real Estate Investment Trusts & Infrastructure Investment Trusts.

3 November, 2014

 

 

Securities And Exchange Board Of India (Real Estate Investment Trusts) Regulations, 2014

 

On October 10, 2013, the Securities and Exchange Board of India (‘SEBI’) had come out with a consultative paper and draft form of the SEBI (Real Estate Investment Trusts) Regulations, 2014, (‘REITs Regulations’) on which comments were sought till October 31, 2013. SEBI approved the REITs Regulations in its board meeting held on August 10, 2014 and thereafter on September 26, 2014, the REITs Regulations were notified in the official gazette. Set out below is a summary of the key features of the REITs Regulations:


1. What Is A Real Estate Investment Trust?


A real estate investment trust (‘REIT’) is a trust set up under the provisions of the Indian Trusts Act, 1882 (‘Trusts Act’), and registered with SEBI under the REITs Regulations. A REIT is set up for the purpose of investing in (i) real estate assets in India; and/or (ii) securities of special purpose vehicles (‘SPVs’) holding real estate assets in India, in each case, in accordance with the offer document/follow-on offer document. The real estate assets and any other assets owned by the REIT, whether directly or through an SPV, are referred to as ‘REIT Assets’.


2. What Are The Investment Conditions For A REIT?


A REIT cannot invest in vacant land or agricultural land or mortgages other than mortgage backed securities. A REIT cannot invest in units of other REITs.


At least 80% of the value of the REIT Assets shall be invested proportionate to the holding of the REITs in completed and rent generating properties, i.e., properties which have been leased or rented out in accordance with an agreement entered into for the purpose. However, if such investment has been made through an SPV, only the proportion of direct investments in properties by such SPVs shall be considered and the remaining portion shall be included under the limit of 20% mentioned below. Further, if any project is implemented in stages, the part of the project which is completed and rent-generating shall be considered and the remaining portion shall be included under the limit of 20% mentioned below.


Not more than 20% of the value of the REIT Assets shall be invested proportionate to the holding of the REITs in:


i. properties, in which not more than 10% of the value of the REIT Assets shall be invested are: (a) under construction properties which shall be held by the REIT for not less than three years after completion, (b) under construction properties which are part of the existing income generating properties owned by the REIT which shall be held by the REIT for not less than three years after completion; (c) completed and not rent generating properties which shall be held by the REIT for not less than three years from date of purchase;


ii. listed or unlisted debt of companies or body corporates in the real estate sector (exclusive of any investment made in the debt of an SPV);


iii. mortgage backed securities;


iv. equity shares of companies listed on a recognized stock exchange in India which derive not less than 75% of their operating income from real estate activity (as per the audited accounts of the previous financial year);


v. government securities;


vi. money market instruments or cash equivalents,


vii. unutilized floor space index (i.e., the buildable area on a plot of land as specified by the competent authority) of a project where it has already made investment; and


viii. transferable development rights (i.e.. development rights issued by the competent authority under relevant laws in lieu of the area relinquished or surrendered by the owner or developer or by way of declared incentives by the government or authority) acquired for the purpose of utilization with respect to a project where it has already made investment.


A REIT shall invest in at least two projects, directly or through the SPV, with not more than 60% of value of assets, proportionately on a consolidated basis, invested in one project. A REIT is required to hold completed and rent generating property, whether directly or through the SPV, for a period of not less than three years from the date of purchase of such property by the REIT or SPV. There are several restrictions imposed under the REITs Regulations on related party transactions entered into by a REIT.

 

3. Can A REIT Invest Through SPVs?


A REIT can invest in properties through SPVs provided that (i) such SPVs hold not less than 80% of their assets directly in such properties and do not invest in other SPVs; (ii) the REIT holds controlling interest and not less than 50% of the equity share capital or interest of such SPV; (iii) such SPVs are not engaged in any activity other than holding and developing property and any other activity incidental to such holding or development; (iv) no other shareholder or partner of the SPV has any rights that prevent the REIT from complying with the provisions of the REITs Regulations; and (v) the manager of the REIT, in consultation with the trustee of the REIT, appoints not less than one authorized representative on the board of directors or governing board of such SPVs.

 

Further, the investment manager of the REIT is required to ensure that in every meeting
including the annual general meeting of the SPV, the voting of the REIT is exercised subject to provisions of the Companies Act, 2013 (‘2013 Act’).

 

4. What Is The Structure Of A REIT As Proposed Under The REITs Regulations?


The REIT will be set up as a trust under the provisions of the Trusts Act. The principal structure of a REIT will consist of a trustee, sponsor, manager and a valuer. The persons designated as sponsor, manager and the trustee are required to be separate entities.


5. Can REITs Invest In Other REITs?


A REIT cannot invest in units of other REITs.


6. Can REITs Launch Schemes?

 

No schemes can be launched by REITs.


7. Who Can Invest In REITs?


A REIT can invite subscriptions from, and allot units to, any person whether resident or foreign. Investments by foreign investors will be subject to guidelines that may be specified by SEBI and the Reserve Bank of India from time to time.


8. What Is The Minimum Number Of Investors That A REIT Is Required To Have?


A REIT is required to have a minimum of 200 investors (forming part of the public). In case the number of investors falls below 200, the trustee of the REIT will be required to apply for delisting of the units.


9. What Is The Eligibility Criteria Mentioned For The Sponsor Of REIT Under The REITs Regulations?


While granting registration to an applicant as a REIT under the REITs Regulations, SEBI will consider whether (i) there are not more than three sponsors each holding or proposing to hold not less than 5% of the number of units of the REIT on post-initial offer basis; (ii) the sponsor(s) on a collective basis, have a net worth of not less than INR 1bn with each sponsor having a net worth of not less than INR 200m individually; and (iii) the sponsor(s) or its associates have not less than five years of experience in the development of real estate or fund management in the real estate industry. Further, where the sponsor is a developer, at least two projects of the sponsor are required to be completed.


10. Are There Any Minimum Commitment Requirements For The Sponsor Of The REIT?


The sponsor(s) of a REIT are required to hold:


i. not less than 25% of the total units of the REIT after the initial offer on a post-issue basis of which (a) 25% of the units will be held for a period of not less than three years from the date of listing of such units; (b) units exceeding 25% will be held for a period of not less than one year from the date of listing of such units;


ii. the sponsors shall together hold not less than 15% of the outstanding units of the REIT at all times; and


iii. each sponsor is individually required to hold not less than 5% of the outstanding units of the listed REIT at all times.


If the sponsor proposes to sell its units below the required limits mentioned above, such sale can only be made after a period of three years from the date of listing of the units. Further, prior to such sale, the sponsor is also required to arrange for another person to act as the re-designated sponsor after obtaining the approval of the unit holders.
After such re-designation of the sponsor, the re-designated sponsor is required to hold, not less than 15% of the outstanding units of the REIT at all times.

 

11. What Is The Eligibility Criteria Mentioned For The Manager Of REIT Under The REITs Regulations?


While granting registration to an applicant as a REIT under the REITs Regulations, SEBI will consider whether the manager (i) has a net worth (in case of a body corporate or company) or net tangible assets (in case of a limited liability partnership (‘LLP’)) of not less than INR 100m; (ii) the manager or its associate has not less than five years of experience in the fund management, advisory services or property management in the real estate industry or in development of real estate; (iii) the manager has not less than two key personnel each having not less than five years experience in fund management, advisory services or property management in the real estate industry or in development of real estate; (iv) the manager has not less than half of its directors (in case of a body corporate or company) or members of its governing board (in case of an LLP) as independent and not directors or members of governing board of another REIT and (v) the investment management agreement provides for the responsibilities of the manager in accordance with the REITs Regulations.


12. What Is The Eligibility Criteria Mentioned For The Trustee Of REIT Under The REITs Regulations?


While granting registration to an applicant as a REIT under the REITs Regulations, SEBI will consider whether the trustee (i) is registered with SEBI under the SEBI (Debenture Trustees) Regulations, 1993; (ii) is not an associate of the sponsor, manager; and (iii) has such infrastructure, personnel, etc., as may be specified by SEBI.


13. Can The Trustee Of The REIT Invest In The Units Of The REIT?


The trustee of the REIT and the associates of the trustee are not permitted to invest in units of the REIT.


14. What Is The Eligibility Criteria Mentioned For The Valuer Of REIT Under The REITs Regulations?


The valuer should not be an associate of the sponsor, manager or trustee and should have not less than five years of experience in valuation of real estate.


15. Who Shall Qualify As An Associate Under The REITs Regulations?


The REITs Regulations provide a very wide definition of the term ‘associate’. Associate of any person includes: (i) any person controlled, directly or indirectly, by the said person; (ii) any person who controls, directly or indirectly, the said person; (iii) where the said person is a company or a body corporate, any person(s) who is designated as a promoter(s) of the company or body corporate and any other company or body corporate with the same promoter(s); (iv) where the said person is an individual, any relative of the individual; (v) where the said person is a company, or a body corporate or an LLP, its group companies; (vi) companies or LLPs under the same management; (vii) where the said person is a REIT, related parties to the REIT; (viii) any company or LLP or body corporate in which the person or its directors or partners holds, either individually or collectively, more than 15% of its paid up equity share capital or partnership interest, as the case may be.


16. What Kind Of Obligations Are Imposed On The Manager Of A REIT?


The manager of a REIT is subject to several obligations in respect of the REIT such as (i) ensuring that the real estate assets of the REIT or SPV have proper legal and marketable title and all material contracts including rental or lease agreements entered into on behalf of REITs or SPVs are legal, valid, binding and enforceable by and on behalf of the REIT or SPV; (ii) appointing an auditor for a period of not more than five consecutive years; (iii) arranging for adequate insurance coverage for the real estate assets of the REIT; (iv) in case the REIT invests in under construction properties, undertaking development of the properties, either directly or through the SPV, or appointing any other person for development of such properties and overseeing the progress of development, approval status and other aspects of the properties up to its completion; and (v) filing the draft and final offer document with SEBI and the designated stock exchanges and obtaining the in-principle approval from the stock exchanges.


17. What Are The Ways In Which REITs Can Raise Funds?


After being registered with SEBI, REITs can initially raise funds through an initial public offer and once listed, may subsequently raise funds through follow-on offers.

 

 

18. Are There Any Conditions With Respect To The Units Of The REITs?


Listing of units is mandatory for all REITs. No unit holder of the REIT can be granted any preferential voting or any other rights over another unit holder. Further, the REIT can only issue units in dematerialized form to all applicants.


19. What Are The Conditions On Raising Capital By REITs?


A REIT can only make an initial offer of units upon satisfaction of the following conditions:


i. the REIT is registered with SEBI under the REITs Regulations;


ii. the value of all assets owned by the REIT whether held directly or through an SPV is not less than INR 5bn;


iii. the value of the units proposed to be offered to the public is not less than 25% of the total of the outstanding units of the REIT and the units being offered by way of the offer document;


iv. the offer size is not less than INR 2.5bn;


v. the minimum public float for the units of REIT at all times is required to be 25% failing which action may be taken by SEBI and by the relevant stock exchanges including the delisting of the units; and


vi. the REIT cannot accept subscription, whether in the initial offer or the follow-on public offer of an amount of less than INR 200k from every investor.


A REIT is required to file its offer document with SEBI and complete the offer process in the manner prescribed in the REITs Regulations. A REIT is required to undertake its initial offer within three years from the date of registration as a REIT with SEBI, failing which the REIT is required to surrender its certificate of registration with SEBI and cease to operate as a REIT. The period of three years may be extended by a further period of one year by SEBI at its discretion. A REIT that has surrendered its registration may re-apply for registration, if it so desires.


20. Are There Any Specific Contents That Are Required To Be Included In The Offer Document?


The offer document or the follow-on offer document of the REIT is required to include certain mandatory disclosures such as the names and details of the parties, structure of the REIT, terms of the offer including number of units, price, etc., market overview including description of assets held by the REIT, description of the investment strategy, purpose of the issue, projections of income over the next three years, rights of the unit holders, title disclosures of the properties, etc. Further, the offer document cannot provide any guaranteed returns to the investors and should also include such other disclosures as may be specified by SEBI.


21. When Is The REIT Required To Refund The Money To The Applicants?


The REIT is required to refund money to all applicants within 15 days from the closure of the offer, in case: (i) it fails to collect subscription of amount less than 75% of the issue size as specified in the offer document/follow-on offer document; (ii) the number of subscribers forming part of the public to the initial offer, is less than 200. In case the money received is in excess of the extent of over-subscription as specified in the offer document/follow-on offer document, the money shall be refunded to applicants to the extent of the oversubscription. However, such right to retain such over subscription cannot exceed 25% of the issue size.


22. Are There Any Conditions On The Sources Of Revenue Of A REIT?


Not less than 75% of the revenues of the REIT and the SPV, other than gains arising from disposal of properties, should, at all times, be from rental, leasing and letting real estate assets or any other income incidental to the leasing of such assets. Not less than 75% of values of the REIT assets are required to be rent generating proportionately on a consolidated basis.


23. Are There Any Specific Conditions Applicable To Dividend Distribution By REITs?


A REIT is required to distribute not less than 90% of its net distributable income after tax as dividend to the unit holders on a half yearly basis in accordance with the procedure mentioned in the offer document or follow-on offer document. Such distribution is required to be declared and made not less than once every six months in every financial year and not more than 15 days from the date of such declaration.


24. Are There Any Conditions Imposed On Co-Investments Made By REITs With Any Other Persons?


In case of any co-investment by a REIT with any person in any transaction, (i) the investment by the other person cannot be on terms more favorable than those offered to the REIT; (ii) the investment cannot provide any rights to the person which prevent the REIT from complying with the provisions of the REITs Regulations; and (iii) the agreement with such person is required to include the minimum percentage of distributable profits that will be distributed and entitlement of the REIT to receive not less than pro rata distributions and mode for resolution of any disputes between the REIT and the other person.

 

25. Can A REIT Borrow?


The aggregate consolidated borrowings and deferred payments of the REIT cannot at any time exceed 49% of the value of the REIT Assets. In case the aggregate consolidated borrowings and deferred payments of the REIT exceed 25% of the value of the REIT Assets, then for any further borrowing, a credit rating is required to be obtained from a credit rating agency registered with SEBI; and approval will be required from unit holders where the votes cast in favour of the resolution cannot be less than one and half times the votes cast against the resolution.

 

26. Can A REIT Lend?


A REIT cannot undertake any lending to any person.


27. Are There Any Requirements To Carry Out Valuation Of The Assets Held By A REIT?


A full valuation will be required to be conducted by the valuer of the REIT at least once in every financial year. Such full valuation would include a detailed valuation (including mandatory minimum disclosures as specified in the REITs Regulations) of all assets by the valuer including physical inspection of every property by the valuer.


A half yearly valuation of the REIT assets will be required to be conducted by the valuer for the half year ending September 30 for incorporating any key changes in the previous six months and such half yearly valuation report is required to be prepared within 45 days from the date of end of such half year.


For any transaction involving the purchase or sale of properties, a full valuation of the specific property will be required to be undertaken by the valuer, and (i) in case of a purchase transaction, the property is proposed to be purchased at a value greater than 110% of the value of the property as assessed by the valuer; and (ii) in case of a sale transaction, the property will be proposed to be sold at a value less than 90% of the value of the property as assessed by the valuer; approval is required to be obtained from unit holders where the votes cast in favour of the resolution cannot be less than one and half times the votes cast against the resolution.


Further, any valuation undertaken by any valuer is required to be in accordance with international valuation standards and valuation standards as may be specified by the Institute of Chartered Accountants of India (“ICAI”) for valuation of real estate assets. In case of any conflict, standards specified by ICAI would prevail.


28. Are There Any Additional Conditions Imposed On The Valuer Of The REIT Under The REITs Regulations?


REITs Regulations require the appointment of independent valuers to the REIT and impose a duty of care on all the valuers to ensure that all valuations are done in a fair and impartial manner. The valuer has to be a ‘registered valuer’ as per the provisions of Section 247 of the 2013 Act. The valuer of the REIT is not permitted to invest in the units of the REIT. Further, the trustee of the REIT is required to ensure that the remuneration of the valuer is not linked to or based on the value of the property being valued.


Further, the REITs Regulations do not permit the valuer to value any assets in which it has either been involved with the acquisition or disposal within the last 12 months (other than cases where the valuer was engaged by the REIT for such acquisition or disposal).


29. What Are The Provisions That Govern The Change In Sponsor Or Change In Control Of The Sponsor Of The REIT?


In case of any change in sponsor or re-designated sponsor or change in control of sponsor or re-designated sponsor, approval of unit holders is required to be obtained, wherein votes cast in favour of the resolution cannot be less than three times the votes cast against the resolution. Where such approval is not given by the unit holders, (i) in case of change of sponsor or re-designated sponsor, the proposed re-designated sponsor who proposes to buy the units is required to provide the dissenting unit holders an option to exit by buying their units; and (ii) in case of change in control of sponsor or re-designated sponsor, the sponsor or re-designated sponsor is required to provide the dissenting unit holders an option to exit by buying their units.


If on account of such sale, the holding of unit holders falls below 200 or the minimum public float falls below 25%, then, the trustee is required to apply for delisting of the units of the REIT in accordance with the REITs Regulations.

 

30. What Are The Rights Of Unit Holders Of A REIT?


The REITs Regulations grant several rights to the unit holders such as right to approve a change in investment strategy, change in manager, undertaking transactions value of which is equal to or greater than 15% of the value of the REIT Assets, delisting of units, etc. Further, the unit holders are also entitled to remove the manager, remove the auditor, remove the valuer, request delisting, etc.


31. What Are The Conditions For Related Party Transactions?


All related party transactions that the REIT enters into must be on an arms-length basis in accordance with the relevant accounting standards, in the interest of unit holders, and must be consistent with the strategy and investment objective of the REIT. Further, the REIT is also required to make certain disclosures to the relevant stock exchange, in the offer document or the placement memorandum, as the case may be, and/or to the unit holders of the particular REIT in relation to its related party transactions.


32. Is The REIT Required To Make Any Disclosures?


The REIT is required to make periodic disclosures to SEBI, the stock exchanges and the unit holders on various issues and maintain records in electronic or physical form as specified in the REITs Regulations.


33. What Are The Tax Provisions Applicable To REITs Or Infrastructure Investment Trusts (Collectively Known As ‘Business Trusts’) Under ITA?


The Finance (No. 2) Act, 2014 has provided for special provisions in Chapter XII-FA of the Income tax Act, 1961 (‘ITA’) to grant limited pass through treatment to trusts registered as Business Trusts:


i. Income of a Business Trust in the nature of interest from a SPV shall be exempt from tax in the hands of the Business Trust and, therefore, will not be subject to any tax withholding at the level of the SPV. However, such interest income when distributed to unit holders shall be taxable in the hands of the unit holders. Accordingly, tax withholding at the rate of 5% (plus applicable surcharge and education cess) on interest income distributed to non-resident unit holders, and at 10% (plus applicable surcharge and education cess) to resident unit holders shall be effected by the Business Trust.


ii. Dividend distribution tax will apply on dividend income received by Business Trusts at the level of SPVs. Such dividend income, thereafter will be exempt from tax in the hands of the Business Trust as well as the unit holders and will not be subject to any tax withholding.


iii. Capital gains on disposal of assets by the Business Trust will be taxed in its hands at the applicable rates under the ITA. However, further distribution of such capital gains would be exempt in the hands of the unit holders.


iv. Any other income of the Business Trust (i.e., except capital gains, dividend and interest from SPVs) shall be taxable in the hands of the Business Trust at the maximum marginal rate.


v. Long term capital gains arising to retail investors (non-sponsor unit holders) from transfer of units of a Business Trust would be exempt from capital gains tax where the transaction is subject to securities transaction tax (‘STT’).


vi. Short term capital gains arising to retail investors (non-sponsor unit holders) from transfer of units of a Business Trust would be taxable at the rate of 15% (plus applicable surcharge and education cess) where the transaction is subject to STT.


vii. Capital gains taxation on transfer of shares in SPVs by the sponsors in exchange of units in a Business Trust at the initial stage shall be deferred in the hands of the sponsors till the time units of the Business Trust are disposed by the sponsors. No preferential capital gains regime whether short term or long term (consequential to levy of STT) will be available to the sponsor on disposal of units of the Business Trust which were acquired in consideration of transfer of shares of SPVs. For computing capital gains, cost of shares of SPV to the sponsor shall be deemed to be the cost of the Business Trust units. Further, the holding period of such SPV shares shall be included in the holding period of the Business Trust units.

 

Securities And Exchange Board Of India (Infrastructure Investment Trusts) Regulations, 2014


On December 20, 2013, the Securities and Exchange Board of India (‘SEBI’) had come out with a consultative paper on Infrastructure Investment Trusts (‘InvITs’) on which comments were sought till January 20, 2014. On July 17, 2014, SEBI came out with the draft SEBI (Infrastructure Investment Trusts) Regulations, 2014 (‘InvITs Regulations’), which were subsequently approved by SEBI in its board meeting held on August 10, 2014. Thereafter, on September 26, 2014, the InvITs Regulations were notified in the official gazette. Set out below is a summary of the key features of the InvITs Regulations.


1. What Is An InvIT?


An InvIT is a trust set up under the provisions of the Indian Trusts Act, 1882, duly registered under the Registration Act, 1908, and registered with SEBI under the InvITs Regulations.


2. What Is The Structure Of An InvIT Under The InvITs Regulations?


As per the InvITs Regulations, the principal structure of an InvIT will consist of a trustee, sponsor, investment manager and project manager(s). The persons designated as the sponsor, investment manager, and trustee are required to be separate entities.


3. What Are The General Investment Conditions For InvITs?


An InvIT can only invest in:


i. Special Purpose Vehicles: A company or a limited liability partnership (a) in which the InvIT holds or proposes to hold controlling interest and not less than 50% of the equity share capital or interest (except where the same is not possible because of regulatory requirements or requirements emanating from the concession agreement which will be subject to certain specifications set out under the InvIT Regulations); (b) which holds not less than 90% of its assets directly in Infrastructure Projects and does not invest in other special purpose vehicles (‘SPVs’); and (c) which is not engaged in any other activity other than activities pertaining to and incidental to the underlying Infrastructure Projects; or


ii. Eligible Infrastructure Projects: An Infrastructure Project which, prior to the date of its acquisition by, or transfer to, the InvIT, satisfies the following conditions: (a) in case of public private partnership projects (‘PPP Projects’), the Infrastructure Project should be completed and revenue generating , or the Infrastructure Project should be a project which is in its pre- commercial operation date stage; and (b) in case of non PPP Projects, the Infrastructure Project should have received all the requisite approvals and certifications for commencing construction of the project; or


iii. securities in India.


Any investment by the InvIT should be in accordance with the provisions of the InvITs Regulations and the investment strategy stated in the offer document or placement memorandum, as the case may be, of the InvIT.


4. What Kind Of Infrastructure Projects Can InvITs Invest In?


As specified in question (3) above, an InvIT can invest either directly in Eligible Infrastructure Project or indirectly through SPVs that hold not less than 90% of their assets in Infrastructure Projects. The InvITs Regulations define an ‘Infrastructure Project’ as any project in infrastructure sector.


Where the InvIT has invested in an Infrastructure Project that is a PPP Project, the InvIT is mandatorily required to invest in the Infrastructure Project through an SPV.


5. Are There Any Additional Conditions Applicable In Case An InvIT Invests In Eligible Infrastructure Projects Through SPVs?


In case the InvIT has invested in an Eligible Infrastructure Project through an SPV:


i. No other shareholder or partner of the SPV will have any rights that prevent the InvIT from complying with the provisions of the InvITs Regulations, and an agreement shall be entered into with such shareholders/partners to that effect prior to investment in the SPV;


ii. In case the SPV is a company, the investment manager of the InvIT, in consultation with the Trustee of the InvIT, will appoint not less than one authorized representative on the board of directors or the governing board of such SPV; and

 

iii. The investment manager of the InvIT will ensure that in every meeting, including an annual general meeting of the SPV, the voting of the InvIT is exercised.


6. Are There Any Additional Conditions Applicable In Case An InvIT Invests Or Proposes To Invest More Than 10% Of Its InvIT Assets In Under Construction Projects?


In case the InvIT invests more than 10% of its InvIT assets in under construction assets, the InvIT is required to invest in Eligible Infrastructure Projects or securities of companies or partnership interests of limited liability partnerships (‘LLPs’) in the infrastructure sector, i.e., companies or LLPs which derive not less than 80% of their operating income from the infrastructure sector as per the audited accounts of the previous financial year.


However, the InvIT can invest its un-invested funds in liquid funds/government securities/ money market instruments/cash equivalents.


7. Are There Any Additional Conditions Applicable In Case An InvIT Invests Or Proposes To Invest Not Less Than 80% Of Its InvIT Assets In Completed And Revenue Generating Projects?


An InvIT that invests not less than 80% of the value of its InvIT assets, proportionate to the holding of the InvITs, in completed and revenue generating infrastructure projects will be subject to the following conditions:


i. If the investment has been made through an SPV, whether by way of equity or debt or equity linked instruments or partnership interest, only the proportion of direct investments in Eligible Infrastructure Projects by such SPVs will be considered for calculating the cap of 80% and the remaining portion shall be included under the cap of 20% mentioned in paragraph 7(ii) below. If any project is implemented in stages, the part of the project which can be categorised as completed and revenue generating will be considered for calculating the cap of 80% and the remaining portion shall be included under the cap of 20% mentioned in paragraph 7(ii) below.


ii. Not more than 20% of value of the assets will be invested in (a) under-construction Eligible Infrastructure Projects, whether directly or through SPVs, subject to the condition that investment in such under-construction assets cannot exceed 10% of the value of the InvIT assets; (b) listed or unlisted debt of companies or body corporate in infrastructure sector, subject to the condition that any investment made in debt of the SPV will not be included; (c) equity shares of companies listed on a recognized stock exchange in India which derive not less than 80% of their operating income from the infrastructure sector as per the audited accounts of the previous financial year; (d) government securities; (e) money market instruments, liquid mutual funds or cash equivalents;
If the conditions specified in paragraphs 7(i) and 7(ii), above, are breached on account of market movements of the price of the underlying assets/securities, the investment manager of the InvIT is required to notify the trustee of the InvIT and ensure that the conditions specified above are satisfied within six months (extendable to one year with the approval of the unit holders of the InvIT) of such breach.


8. What Are The Ways In Which InvITs Can Raise Funds?


After being registered with SEBI, InvITs can initially raise funds through an initial public offer and once listed, may subsequently raise funds through follow-on offers. Listing of units is mandatory for all InvITs.


9. Are There Any Restrictions On Fund Raising Activities Of An InvIT That Invest More Than 10% Of Its Assets In Under-Construction Projects?


An InvIT that invests or proposes to invest in under-construction projects, value of which is more than 10% of the value of the InvIT assets is required to raise funds from not less than five investors and not more than 1000 investors.


Further, minimum investment from any investor should be INR 10m. Such InvITs can raise funds (i) by way of private placement only through a placement memorandum which is required to be submitted to SEBI at the time of filing an application for registration as an InvIT; and (ii) from qualified institutional buyers (as defined under the SEBI (Issue of Capital and Disclosure Requirements) and body corporates, whether Indian or foreign. Investment by foreign investors will be subject to guidelines specified by the Reserve Bank of India (‘RBI’) and the government from time to time.

 

10. Are There Any Restrictions On Fund Raising Activities Of An InvIT That Holds Not Less Than 80% Of Its Assets In Completed And Revenue Generating Infrastructure Projects?


An InvIT that holds not less than 80% of its assets in completed and revenue generating Infrastructure Projects can raise funds in the following ways: (i) initial issue of units is required to be by way of initial offer only; (ii) any subsequent issue of units after initial offer can be by way of follow-on offer, preferential allotment, qualified institutional placement, rights issue, bonus issue or any other mechanism as may be specified by SEBI in the manner stipulated thereunder; (iii) minimum subscription from any investor in an initial and follow-on offer is required to be INR 1m; and (iv) the value of the units proposed to be offered to the public in an initial offer cannot be less than 25% of the total of the outstanding units of the InvIT and the units being offered by way of the offer document.


An InvIT can make an initial offer of units only (i) after it is registered with SEBI as an InvIT; (ii) the value of the proposed holding of the InvIT in the underlying assets is not less than INR 5bn; and (iii) the offer size is not less than INR 2.5bn.


11. Are There Any Restrictions On The Nature Of Units Of An InvIT?


An InvIT cannot grant any unit holder with any preferential voting or any other rights over another unit holder. Further, an InvIT cannot have multiple classes of units of InvITs.


12. When Is An InvIT Required To Surrender Its Certificate Of Registration?


An InvIT that fails to undertake any offer of its units, whether by way of public issue or private placement, within three years from the date of registration with SEBI is required to surrender its certificate of registration to SEBI and cease to operate as an InvIT. SEBI may, in its discretion extend such three year period by a further period of one year. After surrender of its registration, an InvIT can re-apply for registration if it so desires. 


13. How Long Is An InvIT Required To Hold An Infrastructure Asset?


An InvIT is required to hold an infrastructure asset, i.e., assets owned by the InvIT whether directly or through an SPV (including all rights, interests and benefits arising from and incidental to ownership of such assets) for a period of not less than three years from the date of purchase of the asset by the InvIT or the SPV.


14. Can InvITs Invest In Other InvITs?


An InvIT cannot invest in units of other InvITs.


15. Can InvITs Launch Schemes?


No schemes can be launched under by an InvIT.


16. Who Can Invest In InvITs?


An InvIT can invite subscriptions from, and allot units to, any person whether resident or foreign. Investments by foreign investors are subject to guidelines that may be specified by SEBI and RBI from time to time.


17. What Is The Eligibility Criteria Mentioned For The Sponsor Of InvIT Under The InvITs Regulations?


While granting registration to an applicant as an InvIT under the InvITs Regulations, SEBI will consider whether (i) there are not more than three sponsors, (ii) each sponsor has a net worth of at least INR 1bn if it is a body corporate or a company; or (iii) has net tangible assets of not less than INR 1bn in case it is a Limited Liability Partnership.


In case of PPP projects, where the sponsor is the SPV, the net worth/net tangible assets shall be as defined in the eligibility criteria of the project documents.


SEBI would also look into whether the sponsor or its subsidiary or its holding company has a sound track record in development of infrastructure or fund management in the infrastructure sector. In this respect, “sound track record” means experience of at least five years, and where the sponsor is a developer, at least two projects of the sponsor should have achieved financial closure.


18. Are There Any Minimum Commitment Requirements For The Sponsor Of The InvIT?


The sponsor is required to set up the InvIT and appoint the trustee of the InvIT.
The sponsor(s) together are required to hold not less than 25% of the total units of the InvIT after initial issue of units on a post-issue basis for a period of not less than three years from the date of the listing of such units, except in PPP project cases where such acquiring or holding is disallowed by government, or under any provisions of the concession agreement, or any other such agreement. During this period, (i) the sponsor may continue to maintain such holding at the SPV level; (ii) the consolidated value of all such holdings at the SPV level and the value of the units on the InvIT held by the sponsor cannot be less than the value of 25% of the total units of the InvIT after initial issue of units on a post issue basis; (iii) such units of the InvIT and shares or interest in the SPV are required to be held for a period of not less than 3 years from the date of listing of units of the InvIT; and (iv) in case such holding of sponsor in the SPV results in the InvIT not having controlling interest and not having more than 50% shareholding or interest in the SPV, the sponsor is required to enter into a binding agreement with the InvIT to ensure that decisions taken by the sponsor including voting with respect to the InvITs or the unit holders and will also be subject to further directions issued by SEBI in this behalf.


Any holding of the sponsor in the InvIT, exceeding 25% on a post issue basis is required to be held for a period of not less than 1 year from the date of listing of such units.


19. What Is The Eligibility Criteria Mentioned For The Investment Manager Of An InvIT Under The InvITs Regulations?


While granting registration to an applicant as an InvIT under the InvITs Regulations, SEBI will consider whether the investment manager (i) has a net worth of not less than Rs.100 million if the investment manager is a body corporate or company or has net tangible assets of value not less than INR 100m in case the investment manager is an LLP; and (ii) has at least five years of experience in fund management, advisory services or development in the infrastructure sector; and (iii) has at least two employees each who have at least five years of experience in fund management, advisory services or development in the infrastructure sector; and (iv) has not less than one employee who has at least five years experience in the relevant sub-sectors in which the InvIT invests or proposes to invest; and (v) has an office in India from where the operations pertaining to the InvIT are proposed to be conducted; and (vi) has entered into an investment management agreement with the trustee of the InvIT; and (vii) has not less than half of its directors in case of a company or members of the governing board in case of an LLP as independent and not directors or members of the governing board of another InvIT.


20. What Is The Eligibility Criteria Mentioned For The Trustee Of An InvIT Under The InvITs Regulations?


A trustee can either be (i) a debenture trustee registered with the SEBI and not an associate of the sponsor(s)/investment manager; or (ii) a person with such wherewithal with respect to infrastructure, personnel, etc., as specified by SEBI in this regard.


21. Can The Trustee Of The InvIT Invest In The Units Of The InvIT?


The trustee or its associates cannot invest in units of the InvIT in which it is designated as the trustee.


22. What Is The Eligibility Criteria Mentioned For The Valuer Of InvIT Under The InvITs Regulations?


The valuer should not be an associate of the sponsor, investment manager or trustee and should have not less than five years of experience in valuation of infrastructure assets.


23. Who Shall Qualify As An Associate Under The InvITs Regulations?


The InvITs Regulations provides a very wide definition of the term ‘associate’. Associate of any person includes: (i) any person controlled, directly or indirectly, by the said person; (ii) any person who controls, directly or indirectly, the said person; (iii) where the said person is a company or a body corporate, any person(s) who is designated as a promoter(s) of the company or body corporate and any other company or body corporate with the same promoter(s); (iv) where the said person is an individual, any relative of the individual; (v) where the said person is a company, body corporate, or an LLP, its group companies; (vi) companies or LLPs under the same management; (vii) where the said person is an InvIT, related parties to the InvIT; (viii) any company or LLP or body corporate in which the person or its directors or partners hold, either individually or collectively, more than 15% of its paid up equity share capital or partnership interest, as the case may be.


24. Are There Any Specific Contents That Are Required To be Included In The Offer Document?


The offer document or the follow-on offer document of the InvIT is required to include certain mandatory disclosures such as the names and details of the parties, structure of the InvIT, terms of the offer including number of units, price, timelines, market overview, description of assets held by the InvIT, description of the investment strategy, purpose of the issue, rights of the unit holders, title disclosures of the properties, etc., and other disclosures as may be specified by SEBI. Further, the offer document cannot provide for any guaranteed returns to the investors.


25. When Is The InvIT Required To Refund The Money To The Applicants?


The InvIT is required to refund money to all applicants, in case: (i) it collects a subscription amount of less than 75% of the issue size as specified in the final offer document; (ii) the moneys received are in excess of the extent of over-subscription as specified in the final offer document (the right to retain such over-subscription however, cannot exceed 25% of the issue size); or (iii) the number of subscribers to the initial offer forming part of the public is less than 20.


26. What Is The Manner In Which The InvIT Or The SPV In Which The InvIT Has Invested Should Make Distributions?


In case the InvIT has invested through an SPV, not less than 90% of net distributable income after tax of the SPV is required to be distributed to the InvIT in proportion to its holding in the SPV. In case the InvIT has directly invested in the Eligible Infrastructure Project or securities of the companies, not less than 90% of net distributable income after tax of the InvIT is required to be distributed to the unit holders. Distributions are required to be declared and made not less than once every six months in every financial year in case of publicly offered InvITs and not less once every year in case of privately placed InvITs. Such distributions will be as per the dates and in the manner mentioned in the offer document or the placement memorandum, as the case may be, of the InvIT and are required to be made no later than 15 days from the date of declaration of distributions.


In case distributions are not made within 15 days from the date of declaration, then the investment manager will be liable to pay interest to the unit holders at the rate of 15% per annum till the distribution is made and such interest cannot be recovered in the form of fees or any other form payable to the investment manager by the InvIT.


27. How Are Distributions Required To Be Made In Case The Infrastructure Asset Is Sold By The InvIT Or The SPV Or If The Equity Shares Or Interest In The SPV Are Sold By The InvIT?


In case the infrastructure asset is sold by the InvIT or the SPV, as the case may be, or in case of a PPP project, if the equity shares or interest in the SPV are sold by the InvIT, then distributions will be made to the InvIT or the unit holders in the following manner:
i. if the SPV or the InvIT, as the case may be, proposes to re-invest gains, if any, into another infrastructure asset, the SPV or the InvIT, as the case may be, shall not be required to distribute any gains from such sale to the InvIT or to the unit holders, respectively;


ii. if the SPV or the InvIT, as the case may be, proposes not to invest the gains made into any other infrastructure asset, it will be required to distribute the same manner as is mentioned in paragraph 26 above.


28. Are There Any Conditions Imposed On Co-Investments Made By InvITs With Any Other Persons?


In case of any co-investment by an InvIT with any person in any transaction, (i) the investment by the other person cannot be on terms more favorable than those offered to the InvIT; (ii) the agreement cannot provide any rights to the person which would prevent the InvIT from complying with the provisions of the InvITs Regulations; (iii) the agreement with such person is required to include the minimum percentage of distributable profits that will be distributed and entitlement of the InvIT to receive not less than pro rata distributions and mode for resolution of any disputes between the InvIT and the other person.


29. Can An InvIT Borrow?


The aggregate consolidated borrowings and deferred payments of the InvIT (net of cash and cash equivalents) cannot at any time exceed 49% of the value of the InvIT’ s assets. In case the aggregate consolidated borrowings and deferred payments of the InvIT exceed 25% of the value of the InvIT’ s assets, then for any further borrowing, a credit rating is required to be obtained from a credit rating agency registered with SEBI, and approval of the unit holders is required to be obtained in such a manner that the votes cast in favour of the borrowing cannot be less than one and half times the votes cast against the resolution of borrowing.


30. Are There Any Requirements To Carry Out Valuation Of The Assets Held By An InvIT?


A full valuation of all assets by the valuer including physical inspection of every Infrastructure Project is required to be conducted by the valuer not less than once every year and such valuation is required to be conducted at the end of the financial year (ending on March 31) within two months from the end of such year.


A half yearly valuation is also required to be conducted for ever half year (ending on September 30) for a publicly offered InvIT to incorporate any key changes in the previous six months and such a half yearly valuation report must be undertaken within not more than one month from the end of such half year.


Every InvIT is required to submit such valuation reports to the designated stock exchanges on which its units are listed within 15 days from the receipt of such valuation reports.


While purchasing or selling infrastructure projects, either directly or through SPVs for publicly offered InvITs, an InvIT will be required to get a full valuation of the specific project; in case of a purchase transaction, the asset should not be purchased at a value greater than 110% of the value of the asset as assessed by the valuer; and in case of a sale transaction, the asset should not be sold at a value less than 90% of the value of the asset as assessed by the valuer.


Further, any valuation undertaken by any valuer is required to be in accordance with international valuation standards and valuation standards as may be specified by the Institute of Chartered Accountants of India (‘ICAI’) for valuation of real estate assets. In case of any conflict, standards specified by ICAI would prevail.


31. Are There Any Additional Conditions Imposed On The Valuer Of The InvIT Under The InvITs Regulations?


InvITs Regulations impose a duty of care on all the valuers to ensure that all valuations are done in a fair and impartial manner. The valuer has to be a ‘registered valuer’ as per the provisions of Section 247 of the Companies Act, 2013. The valuer of the InvIT is not permitted to invest in the units of the InvIT. Further, the trustee of the InvIT is required to ensure that the remuneration of the valuer is not linked to or based on the value of the property being valued.


32. What Are The Rights Of Unit Holders Of An InvIT?


The InvITs Regulations grant several rights to the unit holders such as right to approve a change in investment strategy, change in investment manager, request delisting of units, etc. Further, the unit holders are also entitled to remove the investment manager, remove the auditor, remove the valuer, etc.


33. What Are The Instances When The Units Of The InvIT Can Be Delisted From The Designated Stock Exchange(s)?


The trustee of the InvIT has to apply for delisting of the units of the InvIT from the stock exchange(s) in any of the following circumstances: (i) if the minimum public holding falls below the limit of 25% of the total number of outstanding units; or (ii) if the number of unit holders of the InvIT other than sponsor of the InvIT (a) in case of privately placed InvIT, falls below five (each holding not more than 25% of the units of the InvIT); and (b) in case of a public issue, falls below 20 (each holding not more than 25% of the units of the InvIT); or (iii) if there are no projects or assets remaining under the InvIT for more than six months and the InvIT proposes to not invest in any project in the future; or (iv) if SEBI or the designated stock exchange(s) itself require the such delisting due to violation of either the listing agreement or the InvITs Regulations; or (v) if upon the request of the sponsor or the investment manager for such delisting and the same has been approved by the unit holders, or (vi) if the unit holders themselves apply for such delisting, or (vii) SEBI or the designated stock exchange(s) requires such delisting in the interest of the unit holders. However, in the instance that (i) or (ii) is breached, the trustee may provide the investment manager six months to rectify such shortfall. Further, SEBI has been given wide powers when such an application for delisting is presented, it can, amongst others, provide additional time to the InvIT or the parties to comply with the InvITs Regulations reject the application and take any other action as it deems fit, etc.


34. Who All Are Considered As Related Parties To An InvIT?


Under the InvITs Regulations, related parties of the InvIT include, (i) parties to the InvIT; (ii) any unit holder who holds, directly or indirectly, more than 20% of the units of the concerned InvIT; and (iii) associates, promoters, directors and partners of the persons mentioned in (i) and (ii) above.


35. What Are The Conditions For Related Party Transactions?


All related party transactions that the InvIT enters into must be on an arms-length basis in accordance with the relevant accounting standards, in the interest of unit holders, and must be consistent with the strategy and investment objective of the InvIT. Further, the InvIT is also required to make certain disclosures to the relevant stock exchanges, in the offer document or the placement memorandum, as the case may be, and/or to the unit holders of the particular InvIT in relation to its related party transactions.

 

36. Is The InvIT Required To Make Any Disclosures?


The InvIT is required to make periodic disclosures to SEBI, the stock exchanges and the unit holders on various issues and maintain records in electronic or physical form as specified in the InvITs Regulations.


37. What Are The Tax Provisions Applicable To InvITs Or REITs (Collectively Known As ‘Business Trusts’) Under ITA


The Finance (No. 2) Act, 2014 has provided for special provisions in Chapter XII-FA of the Incometax Act, 1961 (‘ITA’) to grant limited pass through treatment to trusts registered as Business Trusts:


i. Income of a Business Trust in the nature of interest from an SPV shall be exempt from tax in the hands of the Business Trust and, therefore, will not be subject to any tax withholding at the level of the SPV. However, such interest income when distributed to unit holders shall be taxable in the hands of the unit holders. Accordingly, tax withholding at the rate of 5% (plus applicable surcharge and education cess) on interest income distributed to non-resident unit holders, and at 10% (plus applicable surcharge and education cess) to resident unit holders shall be effected by the Business Trust.


ii. Dividend distribution tax will apply on dividend income received by Business Trusts at the level of SPV. Such dividend income, thereafter will be exempt from tax in the hands of the Business Trust as well as the unit holders and will not be subject to any tax withholding.


iii. Capital gains on disposal of assets by the Business Trust will be taxed in its hands at the applicable rates under the ITA. However, further distribution of such capital gains would be exempt in the hands of the unit holders.


iv. Any other income of the Business Trust (i.e., except capital gains, dividend and interest from SPV) shall be taxable in the hands of the Business Trust at the maximum marginal rate.


v. Long term capital gains arising to retail investors (non-sponsor unit holders) from transfer of units of a Business Trust would be exempt from capital gains tax where the transaction is subject to securities transaction tax (‘STT’).


vi. Short term capital gains arising to retail investors (non-sponsor unit holders) from transfer of units of a Business Trust would be taxable at the rate of 15% (plus applicable surcharge and education cess) where the transaction is subject to STT.


vii. Capital gains taxation on transfer of shares in SPVs by the sponsors in exchange of units in a Business Trust at the initial stage shall be deferred in the hands of the sponsors till the time units of the Business Trust are disposed by the sponsors. No preferential capital gains regime whether short term or long term (consequential to levy of STT) will be available to the sponsor on disposal of units of the Business Trust which were acquired in consideration of transfer of shares of SPVs. For computing capital gains, cost of shares of SPV to the sponsor shall be deemed to be the cost of the Business Trust units. Further, the holding period of such SPV shares shall be included in the holding period of the Business Trust units.

 

AZB

 

For further information, please contact:

 

Sai Krishna Bharathan, AZB & Partners

sai.krishna@azbpartners.com

 

Anil Kasturi, AZB & Partners

anil.kasturi@azbpartners.com


Sunil Agarwal, AZB & Partners

sunil.agarwal@azbpartners.com


Hardeep Sachdeva, AZB & Partners

hardeep.sachdeva@azbpartners.com

Comments are closed.