What are the basic source-of-income requirements for a REIT?

Regulation 18 of the SEBI (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations), issued by the Securities and Exchange Board of India (SEBI), relates to investment conditions and distribution policies and prescribes that:

• A minimum of 80 per cent of the value of a REIT’s assets shall be invested in completed rent or income-generating properties.
• A maximum of 20 per cent of the value of the REIT’s assets may be invested in (and only) the following:
  • properties under construction that shall be held by the REIT for at least three years after completion;
  • listed or unlisted debt of companies or body corporates in the real estate sector;
  • mortgage-backed securities; or
  • equity shares of listed and unlisted companies deriving no less than 75 per cent of their operating income from real estate activities.
• At all times, at least 50 per cent of the consolidated revenues of the REIT, its holding company and special purpose vehicles, other than gains arising from the disposal of properties, shall be from renting, leasing and letting real estate assets or any other income incidental to the leasing of such assets.

What are the basic asset composition requirements for a REIT?

The REIT Regulations prescribes that the value of the REIT’s assets is required to be at least 5 billion Indian rupees. In this respect, ‘value’ means the value of the specific portion of the REIT’s holding in an underlying asset or special purpose vehicles. A REIT can invest in completed rent or income-generating properties, and properties under construction.

What are the basic distribution requirements for a REIT?

Regulation 18(16) of the REIT Regulations specifies the distribution policy with respect to distributions made by the REIT, its holding company or special purpose vehicles as follows:

• At least 90 per cent of the net distributable cash flow of special purpose vehicles must be distributed to the REIT or its holding company, in proportion to its holding in the special purpose vehicles (subject to applicable provisions of the Companies Act, 2013 and the Limited Liability Partnership Act, 2008).
• The minimum net distributable cash flow that must be distributed by a holding company to a REIT (subject to provisions of the Companies Act, 2013, or the Limited Liability Partnership Act, 2008, where applicable) is:
  • 100 per cent of cash flow received by the holding company from special purpose vehicles; and
  • 90 per cent of cash flow generated by the holding company on its own.
• A minimum of 90 per cent of the net distributable cash flow of a REIT must be distributed to unitholders.
• A REIT is required to distribute at least 90 per cent of proceeds arising from the sale of property, equity shares or interest in a holding company or a special purpose vehicle unless the REIT proposes to re-invest the proceeds within one year.
• Distributions must occur at least once every six months.

If a distribution is not made within 15 days of a declaration, then the manager shall be liable to pay interest to the unit holders at the rate of 15 per cent per annum until the distribution is made, and such interest shall not be recovered in the form of fees or any other form payable to the manager by the REIT.

What happens if a REIT fails to meet the basic regulatory requirements? Is relief available if a company fails to meet any of these requirements?

A REIT, parties to the REIT or any other person involved in the activity of the REIT who contravenes any of the provisions of the SEBI Act, 1992, the REIT Regulations, or notifications, guidelines, circulars or instructions issued by SEBI is liable for one or more actions specified therein, including any action provided under the SEBI (Intermediaries) Regulations, 2008.

What best practices should be considered to ensure compliance with the key regulatory requirements for REITs in India?

The manager of a REIT must undertake the management of the REIT’s assets, including lease management, maintenance of the assets, regular structural audits and regular safety audits, either directly or through the appointment and supervision of appropriate consultants.

It would be advantageous to conduct regular and periodic training of personnel to familiarise them with the requirements under the REIT Regulations and other circulars, notifications, guidelines or instructions issued by the SEBI in respect of the regulation of REITs. Such training and awareness of the requirements, prohibitions and penalties may ensure greater compliance and efficient management of the REIT.

Are the requirements for a publicly traded REIT raising capital different from those imposed on private REITs or public non-REIT companies?

Chapter IV of the REIT Regulations provide requirements for issuing and listing of units by virtue of an initial public offer, which includes:

• registration requirements;
• a minimum asset value of 5 billion Indian rupees;
• at least 200 unitholders; and
• a minimum offer size of no less than 2.5 billion rupees.

In addition, the REIT must also comply with the following when making an initial offer:

• Where the post-issue capital of the REIT is less than 16 billion rupees, the units proposed to be offered to the public must not be less than 25 per cent of the total outstanding units of the REIT.
• Where the post-issue capital of the REIT is equal to or more than 16 billion rupees and less than 40 billion rupees, the proposed units must be offered at the minimum value of 4 billion rupees.
• Where the post-issue capital of the REIT is more than 40 billion rupees, the units proposed to be offered to the public must not be less than 10 per cent of the total outstanding units of the REIT.
• The draft offer document must:
  • be filed by the merchant banker with the designated stock exchange and SEBI at least 30 days before filing the offer document; and
  • be made public for comments by hosting it on the website of SEBI, the designated stock exchange and merchant bankers associated with the issue.
• The price of the REIT units issued by way of a public issue must be determined through a book-building process or as specified by SEBI.
• Where the manager fails to allot or list units or refund the money within a specified time, then the manager shall pay interest to unitholders at 15 per cent per annum.
• The offer document must comply with the information requirements provided under Regulation 15 of the REIT Regulations.

SEBI has also issued guidelines for the public issuing of REITs (SEBI Guidelines) which provide further requirements to be followed in relation to the appointment of merchant bankers, offer document requirements, the thresholds for public issue, pricing and the process requirements for the public issue.

What are the ongoing securities and disclosure requirements for publicly traded REITs?

The REIT Regulations prescribe general obligations, disclosure and reporting requirements that must be satisfied. An annual meeting of the unitholders must be held at least once a year and any information that is required to be disclosed in relation to any issue or matter for which approval of the unitholders is required, may be taken up in the meeting. Such information includes the latest annual accounts and performance of the REIT, the latest valuation reports, and the appointment of a valuer.

Regulation 23–26 of the REIT Regulations prescribe the disclosures to be maintained by the REIT, including:

• confirmation that the disclosures in the offer document are in accordance with Schedule III of the REIT Regulations.
• annual reports to all unitholders of the REIT with respect to activities of the REIT within three months from the end of the financial year.
• Half-yearly report to all unitholders of the REIT with respect to the activities of the REIT within 45 days from the end of the half-year ending on 30 September.
• Any information having bearing on the operation or performance of the REIT, including price-sensitive information to designated stock exchanges.
• Disclosures to designated stock exchanges as required under the listing agreements.
• Furnish reports to SEBI as required.
• Maintenance of records pertaining to the activity of the REIT for a period of at least seven years including:
  • financial documents and reports;
  • insurance policies;
  • investment management agreements;
  • title documents for underlying assets; and
  • minutes of meetings and resolutions passed.

Additionally, SEBI Circulars on disclosure of financial information and continuous disclosures further provide for specific requirements and statements in relation to the financials along with the time period within which such information is to be furnished.

Do the stock exchanges in India have any special rules that do not apply to unlisted or private REITs?

No, the REIT Regulations and the SEBI Guidelines provide all the requirements for listing of units of a REIT which are captured under the listing agreement with the designated stock exchange(s).