SEBI amends regulations for REIT and InvIT

Subject : Economy

Section: Capital market

Key Points:

SEBI has brought some changes in regulations of Real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvIT) regarding the lock-in period of sponsors (Sponsor is the party who sets up the REIT/InvIT).
SEBI has amended the minimum unitholding requirement for sponsors. As per the approved changes, sponsors of REITs and InvITs would be required to hold a certain minimum stake in the investment vehicles on a reducing scale for perpetuity. These units will be locked-in and will also be unencumbered (not have any debt against them).
Motivation for the changes:
- The intention is to ensure skin in the game and that the sponsor’s interests are aligned with that of the unitholders.
- The rider of the lock-in units being unencumbered means that the sponsors cannot use the units for leverage. This will ensure that sponsors are not able to indirectly transfer the ownership by pledging these in any way.
Currently, there is a 15 % unit holding lock-in for at least three years. Under the amended regulations, it starts at 15 % for up to three years, then reduces over time with the lower of 1 % of unit capital or ₹1,000 crore after 20 years.
Implications:
- The changes will increase retail investor confidence knowing that the sponsor is there to stay.
- Sponsors will likely find it difficult to undertake mergers and acquisitions or get new sponsors on board owing to the lock-in restrictions .

Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvITs)

A Real Estate Investment Trust (REIT) is an investment instrument that offers proportionate ownership of an income-generating real estate asset to retail investors.
They pool money from multiple investors and use that to buy income-generating real estate properties. REITs manage these assets so that they can earn from capital appreciation and rental income.
The REIT is designed as a tiered structure with Sponsor setting up the REIT which in turn invests into the eligible infrastructure/real estate projects either directly or via special purpose vehicles (SPVs).
An Infrastructure Investment Trust (InvITs) is also a collective investment scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return.
REIT are more retail friendly owing to lesser unit price and higher liquidity.