India's markets regulator, SEBI, has proposed granting special rights to unitholders of REITs and InvITs, including the right to nominate representatives on boards, to strengthen governance norms. The regulator also suggested the concept of self-sponsored REITs and InvITs and proposed applying the principles of stewardship code to board members nominated by unitholders. These proposals aim to empower unitholders, enhance monitoring of investments, and facilitate decision-making. SEBI has sought public comments on the proposals until May 29.
In an effort to enhance governance standards, the Securities and Exchange Board of India (SEBI) has put forth a series of proposals to grant special rights to unitholders of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). These proposals include the provision of the right to nominate a representative on the boards of REITs and InvITs. SEBI has also introduced the concept of self-sponsored REITs and InvITs through a consultation paper.
Furthermore, SEBI has suggested that the principles of stewardship code should be applicable to board members nominated by the unitholders in the investment manager of REITs and InvITs. This move aims to empower unitholders, allowing them to effectively monitor their investments in REITs and InvITs and contribute to the decision-making processes.
SEBI is currently seeking public feedback on these proposals, with the deadline for comments set for May 29. The introduction of REITs and InvITs in India was intended to provide investors with opportunities to participate in real estate and infrastructure projects, offering risk diversification through pooling arrangements.
Typically, REITs primarily invest in completed real estate assets that generate rental income. Privately placed InvITs, on the other hand, can invest in both under-construction assets and completed revenue-generating assets. Public InvITs focus mainly on completed revenue-generating assets.
SEBI's consultation paper highlights the need for special or differential rights in the form of board nomination rights to be granted to certain investors through the offer document. This need arises from the significant investment size and the desire for a certain level of control over the operations of REITs and InvITs.
Accordingly, SEBI has proposed granting special rights, such as the ability to nominate directors to the boards of the manager or investment manager of REITs and InvITs. However, the existing rules for REITs and InvITs do not explicitly provide for the granting of such special or additional rights.
The proposal suggests that any unitholder holding a minimum of 10% of units for every 10% held should be entitled to nominate one director to the board of the manager or investment manager. To avoid an excessively large board due to director nominations by unitholders, SEBI has proposed an alternative option: the formation of a distinct unitholders’ council comprising members nominated by unitholders holding a minimum of 10% of units.
SEBI has also proposed the introduction of a framework for self-sponsored REITs and InvITs. This framework would allow for the emergence of independent, professionally managed managers, providing an additional exit option for sponsors alongside the current option of changing sponsors, as outlined in the existing REIT and InvIT rules.
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