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Key regulatory requirements
What are the basic source-of-income requirements for a REIT?
As per the REIT Regulations, at least 80 per cent of the value of the REIT assets must be invested, inter alia, in completed and rent or income-generating properties. Further, the remaining maximum 20 per cent of the value of the REIT assets must be invested, inter alia, in under-construction properties or completed but no rent generating properties. Provided that such properties shall be held by the REIT for not less than three years after completion, listed or unlisted debt of companies or body corporate in real estate sector, mortgage-backed securities, equity shares of the listed and unlisted companies deriving at least 75 per cent of their operating income from real estate activities, government securities and money market instruments.
A REIT must not invest in vacant land or agricultural land or mortgages other than mortgage-backed securities. However, this restriction does not apply to any land that is contiguous and extension of an existing project being implemented in stages.
What are the basic asset composition requirements for a REIT?
The REIT Regulations prescribe that the value of the REIT assets (ie, real estate assets and any other assets held by a REIT, on a freehold or leasehold basis, either directly or through a holding company or an SPV) must be at least 5 billion rupees, with (1) at least 80 per cent) of the value of the REIT assets invested, inter alia, in completed and rent and/ or income generating properties; and (2) a maximum of the remaining 20 per cent of the value of the REIT assets invested, inter alia, in assets other than the assets mentioned in (2) above.
What are the basic distribution requirements for a REIT?
As per the REIT Regulations, at least 90 per cent of the net distributable cash flow of the SPV must be distributed to the REIT or holding company in proportion of its holding in the SPV. Further, 100 per cent of the cash flows received by the holding company from the underlying SPVs must be distributed to the REIT. However, if the cash flows are generated by the holding company on its own, then at least 90 per cent of such net distributable cash flows must be distributed by the holding company to the REIT.
Out of the net distributable cash flow of a REIT, at least 90 per cent) must be distributed to the unit holders. Such distributions are to be undertaken at least once every six months. If the distributions are not made within 15 days of the declaration, then the manager shall be liable to pay interest to the unit holders at the rate of 15 per cent per annum till the date of such distribution.
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?
As per the REIT Regulations, a REIT or parties to the REIT or any other person involved in the activity of the REIT who contravenes any of the provisions of the Securities and Exchange Board of India (SEBI) Act 1992 or the REIT Regulations, notifications, guidelines, circulars or instructions issued by SEBI may be liable for one or more actions specified therein including any action provided under the Securities and Exchange Board of India (Intermediaries) Regulations 2008. These may, inter alia, include delisting of the REIT units and surrender of the registration certificate obtained by the REIT. However, as per the REIT Regulations, SEBI is authorised to grant additional time to the REITs to comply with the REIT Regulations instead of delisting the units immediately and cancelling or revoking their registration.
What best practices should be considered to ensure compliance with the key regulatory requirements for REITs in your jurisdiction?
The representatives of the sponsor, the manager and the trustee must be subject to regular and periodic training to familiarise them with the various provisions of the REIT Regulations and the circulars, notifications, guidelines or instructions issued by SEBI with respect to REITs. Such training and awareness may ensure greater compliance and efficient management of the REITs.
Are the requirements for a publicly traded REIT raising capital different from those imposed on private REITs or public non-REIT companies?
The REIT Regulations set out the procedure and the conditions to be complied with by a REIT for raising capital. The REIT Regulations set out various conditions for the issuance and listing of REIT units by virtue of an initial public offer, including minimum asset value, minimum number of unit holders and minimum offer size. The REIT Regulations require the initial offer of REITs to be through a public issue and make the listing of the REIT units mandatory. The REIT Regulations currently deal only with public listed REITs and the concept of ‘private REITs’ has not been recognised thereunder.
The provisions relating to raising of capital by public non-REIT companies have been set out, inter alia, under the Companies Act 2013 SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (as the case may be). A public non-REIT company is not mandatorily required to list its shares on a recognised stock exchange. Further, a public non-REIT company is not mandatorily required to adhere to any minimum offer size for raising capital. The conditions or requirements for raising capital by public non-REIT companies are different from the conditions or requirements prescribed for REITs.
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 by a REIT. An annual meeting of the REIT unit holders must be held at least once a year and any information that is required to be disclosed in relation to any issue or matter requiring approval of the unit holders may be taken up in such meeting. The information required to be disclosed may include the latest annual accounts and performance of the REIT, appointment of any registered valuer and the latest valuation reports of the assets of the REIT.
The REIT Regulations prescribe various disclosures to be made by a REIT, which, inter alia, include the following:
Do the stock exchanges in your jurisdiction have any special rules that do not apply to unlisted or private REITs?
The REIT Regulations currently deal only with public listed REITs and the concept of ‘unlisted REITs’ or ‘private REITs’ has not been recognised thereunder. Therefore, there are no special rules that do not apply to unlisted or private REITs.
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