SEBI

Governance Norms Applicable to REITs And InvITs

The important aspects of the governance norms that apply to REITs and InvITs, as announced by SEBI on February 14, 2023, are highlighted in this blog. These are substantial developments that are expected to make a big difference in creating strong governance frameworks for REITs and InvITs on par with listed companies. 

Amendments to the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014^[1] (“InvIT Regulations”) and the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations (“REIT Regulations”) 2014 were published on February 14, 2023, by SEBI. All Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITS”), including those preparing for a listing, must comply with these rules, which are principally linked to governance norms.

New Amendment on Governance Norms for REITs and InvITs

Some of the amendments are effective immediately at the time of the amendment, and others with effective from April 1, 2023. The provisions for the treatment of unclaimed or unpaid distributions, the appointment and reappointment of auditors, the necessity to conduct a limited review of the companies whose accounts are consolidated with the InvIT or REIT, the calculation of leverage thresholds for consolidated borrowings and deferred payments, and the exclusion of cash and cash equivalents from the value of the assets are among those that are effective immediately (and overnight mutual funds having a maturity of one day included as cash and cash equivalents).

The changes that take effect on April 1, 2023, are:-

• the concept of “change in control” and
• the responsibilities and governance norms requirements for the InvIT and REITs.

The eligibility of an independent director, the requirement that an independent woman director sits on the Board of the investment manager, the quorum requirement for a board meeting to include an independent director, the minimum amount of information that must be presented to the Board, and the establishment of a vigil mechanism (including a whistleblower policy) have all been made applicable to InvITs and REITs.

While InvITs and REITs may have been in compliance with some of these requirements, including the fact that they were “high-value debt listed entities” and had outstanding non-convertible debentures that exceeded the prescribed value listed on a recognised stock exchange in India, each InvIT or REIT needs to review the new requirements. Existing unlisted InvITs may require clarification regarding the governance norms requirements that will apply to these entities starting on April 1, 2023.

Governance norms

These are effective from April 1, 2023. InvITs and REITs are now subject to certain provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “LODR Regulations”).

Moreover, the following definitions of certain terms under the LODR Regulations would apply under the InvIT Regulations and the REIT Regulations unless the context clearly indicates otherwise.

 Parties to the InvIT/REIT are referred to as the “promoter” and the “listed entity” is referred to as the InvIT or the investment manager (in the case of InvITs) and the manager (in case of REITs), “Company secretary” is referred to as the “compliance officer” in (iii), “executive director” is referred to as the “non-independent director” in (iv), “non-executive director” is referred to as the “independent director” in (v), “board of directors of the listed entity” is referred to as the “board of directors of the investment manager” in (vi), and (vii) “subsidiary of the listed entity” is the same as holding companies (“HoldCos”) and special purpose vehicles (“SPVs”) held by the InvIT or REIT.

Independent directors

Eligibility: The InvIT Regulations and the REIT Regulations define an independent director. Despite the fact that the definition is based on the LODR Regulations, which apply to businesses with listed equity shares and certain other listed securities, there are some differences, including testing the definition of a related party based on a relationship with the “parties to the InvIT/REIT” (which include the sponsors, investment manager, trustee, sponsor group (for a REIT), and project manager (for an InvIT), as well as the HoldCos and the SPVs, and its/t References to the relationship of certain entities to the InvIT/REIT or the parties to the InvIT/REIT (such as holding companies, subsidiaries, and associates) are made in the definition.   

Appointment: Independent directors must receive the consent of the investment manager’s shareholders before being appointed, removed, or reappointed (and does not appear to require the unitholders’ approval). Under the LODR Regulations, listed firms are authorised to nominate a new independent director within three months of the date of vacancy if an independent director is removed or resigned from the Board. For InvITs and REITs, the three-month forbearance is not applicable. However, the investment manager is expected to ensure that at least 50% of its Board is independent on a continual basis.

Duration: Independent directors may serve for a maximum of five consecutive years, which can be extended for another five years in accordance with the Companies Act of 2013 and any rules made thereunder. There is a three-year cooling-off period also available.

D&O insurance: Independent directors are required to obtain directors’ and officers’ insurance in an amount established by the Board of investment managers.

Cooling-off period for subsequent appointments: After leaving the investment manager’s Board, an independent director is not eligible to be appointed as a non-independent director on the investment manager’s Board, the Board of any holding, subsidiary, or associate companies, or the Board of any company in the promoter group, unless one year has passed since the date of the independent director’s resignation.

Additionally, there are now requirements for independent director meetings, evaluating the performance of non-independent directors, limiting liability, familiarisation programmes, and submitting declarations of independence.

Additional compliance requirements

Extra requirements for compliance

• Following are the newly introduced requirements for secretarial audit, production of compliance certificates, and corporate governance reports:
• Quarterly compliance report: Every quarter, the Board must evaluate compliance reports pertaining to regulations that apply to InvITs and REITs, as well as actions taken to address instances of non-compliance. It goes above and beyond the already existing duty to examine quarterly reports on the performance and activity of the InvIT or REIT.

• Quarterly corporate governance report: Within 21 days of the end of each quarter, a corporate governance report in the required format must be submitted to the stock exchanges. Either the chief executive officer or the compliance officer must sign the report.

• Secretarial compliance report: Every year, within 60 days of the end of the fiscal year, stock exchanges must receive a secretarial compliance report in a format specified by a practising company secretary. This report must be attached to the InvIT/REIT’s yearly report.

• Compliance certificate: With respect to the financial statements of the InvIT or the REIT and internal controls, the chief executive officer, chief financial officer, and compliance officer are obliged to provide a compliance certificate to the Board of investment management. This certificate’s format is similar to the format required by the LODR Rules for listed companies.

Whistle-blower policy and vigil mechanism 

The investment manager is expected to create a vigil mechanism that includes safeguards against employee persecution. The audit committee is required to examine how the vigil mechanism is working. The investment manager can hire an independent service provider to provide or operate the vigil mechanism.

​​Appointment of Auditors 

The 2023 Amendments have brought Investment Trusts’ audit framework into line with those of listed companies. The main modifications are as follows: the appointment of a person or a company to serve as statutory auditors for a period of five years; the term of the individual auditor, which is five consecutive years; the term of the audit firm, which is two terms of five consecutive years; and the cooling-off period, which is five after the term has ended. 

Change in control

The term “change in control” is not a “one-size-fits-all” definition, according to SEBI, which acknowledged this in its board meeting agenda. For example, the “change in control” definition that applies to listed companies might not apply to the sponsor, the investment manager/manager, or the trustee. 

For this, the 2023 Amendments change the definition of “change in control” under the REIT Regulations and InvIT Regulations to include (i) the definition of control under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 for listed body corporates, and (ii) the definition under the Companies Act for unlisted body corporates. Change in control has been outlined as a change in an entity’s legal structure, ownership, or controlling interest for entities other than corporate bodies.

Conclusion

The InvIT Rules and the REIT Regulations historically maintained a softer touch approach to regulation, notably with respect to governance norms. There has been some confusion over the LODR Regulations’ applicability and the additional requirements for InvITs and REITs that were high-value debt-listed entities in the past. These changes make this matter more clear. All InvITs and REITs must read the new modifications, including those planning to register or list.

Also Read:
RBI Guidelines on Corporate Governance for Banks
Corporate governance guidelines for Insurance Companies