Real Estate

Manner of achieving minimum public unitholding – REITs

Manner of achieving minimum public unitholding – REITs

Introduction

The regulatory agency that oversees the REITs (Real Estate Investment Trusts) Regulation, 2014 in India is SEBI (Securities and Exchange Board of India). These rules offer instructions for creating, running, and managing REITs in India. The REIT Regulations 2014 mandate that all listed REITs maintain a minimum public unitholding of 25%. This indicates that public or non-sponsor businesses should hold at least 25% of the REIT’s units. The REIT sponsor may hold the remaining units.

SEBI published Circular No. SEBI/HO/DDHS/PoD2/P/CIR/2023/106 on June 27, 2023, provide a detailed analysis of how Real Estate Investment Trusts (REITs) might meet the required minimum public unitholding. This new regulation represents a substantial update for all REITs, parties to the REIT, and recognized stock exchanges.

Achieving Minimum Public Unitholding

SEBI has suggested several practices that can be used to assist REITs in complying with these rules:

  1. Public distribution of units: By issuing additional units via an offer document, REITs can raise the public’s ownership of their units.
  2. Any listed REIT or InvIT (infrastructure investment trust) must achieve a minimum public holding of at least 25% within three years of the units’ listing date, per SEBI regulations.
  3. Right to issue public unitholders: Condition required:- Units held by the sponsor, manager, and associates may be sold to the general public through an offer document and the secondary market system used by stock exchanges.
  4. Bonus issue: Like rights issues, bonus issues may be made available to holders of public units.
  5. Institutional placement: Units may be allocated via an institutional placement to boost public unitholding.
  6. Selling units on the open market: Units may be sold on the open market if specific requirements and REIT Regulations provisions are met.
  7. Units can be transferred to Exchange Traded Funds (ETFs) managed by SEBI-registered mutual funds, but only under specified circumstances.

Condition required: Sale of units held by the sponsor (s), Manager, and their affiliated or associated parties, as well as the Sponsor Group, in the open market in any of the following methods, provided the requirements are met:

  • Each financial year, until the deadline for meeting the minimum public unitholding requirement specified in the REIT Regulations, the sponsor (s), Manager, and their associates and related parties may sell up to 2% of the REIT’s total paid-up unit capital. However, this sale is subject to a volume cap equal to five times the REIT’s average monthly trading volume.

8. Subject to the condition that the public unit holding in the REIT increases to 25% following the completion of such sale, the sponsor (s), Manager, and their associates and associated parties, as well as the Sponsor Group, may sell up to a maximum of 5% of the paid-up unit capital of the REIT within a financial year.

9. The sale can occur in one or more tranches throughout no more than a year, and the maximum number of units that can be sold is equal to the volume of REIT units that were traded in the year before the announcement.

Condition required: To meet the minimum public unitholding criteria, the sponsor (s), Manager, and their associates/related parties may employ the mechanism described in Sl. No. 7(i) or 7(ii), but not both.

The Manager of the REIT must notify the stock exchange(s) where its units are listed of the following information at least one trading day before any such proposed sale: The following information is essential:

 a) the intention of the Sponsor(s), Manager(s), and their associates, related parties, and Sponsor Group to sell, as well as the reason for the sale;

b) the specifics of the Sponsor(s), Manager(s), and related parties, as well as the Sponsor Group, who propose to sell their unitholding;

c) the total number of units and percentage of the REIT’s unitholding planned to be sold; and

d) How long the divestment process will take to complete?

  • The Manager of the REIT must also assure the recognized stock exchange(s) that they will not purchase any units on the dates they are selling the units as described above from the sponsor (s), Manager, associates, related parties, and Sponsor Group.
  • The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the REIT Regulations, and the REIT, its sponsor, Manager, and their associates, related parties, and sponsor group shall ensure compliance with all applicable legal provisions.

10. Transfer of units held by the sponsor, Manager, and their affiliated or associated parties to an Exchange Traded Fund (ETF) managed by a mutual fund with SEBI registration1. The fund is limited to 5% of the REIT’s paid-up unit capital.

Conditions requirement

The REIT’s manager is required to notify the stock exchange(s) where its units are listed of the following information at least one trading day before the proposed transfer:

  • Details of the Sponsor / Manager / and their associates / related parties / and Sponsor Group who propose to transfer their units to the REIT are as follows:
    • The intention of the sponsor (s) / Manager / and their associates / related parties / and Sponsor Group to transfer units and the purpose of such transfer;
    • The details of the total number of units and percentage of unitholding proposed to be transferred; and
    • Details of the ETF to which units are proposed
    • The Manager of the REIT must also provide an assurance to the recognized stock exchange(s) obtained from the sponsor (s), Manager, and their associates, related parties, and Sponsor Group that they will refrain from subscribing to the units of that ETF to which units have been transferred by the sponsor (s), Manager, and their associates, related parties, and Sponsor Group entities for MPS compliance.

11. The Board may approve any additional strategy on a case-by-case basis.

Conditions required

To request prior approval, the manager of the REIT must present the Board with an application that includes all necessary information. The Board should communicate its choice within 30 days of receiving the proposal or any additional material requested from the REIT Manager.

Role of Stock Exchange

The SEBI has requested that stock exchanges keep an eye on the strategies used by REITs and InvITs to enhance the number of public units they possess. A quarterly report will be made to the regulator if the bourse needs to comply more with the method.

The role of stock exchanges is vital in maintaining adherence to these procedures, and they are accountable for notifying SEBI of any violations every quarter.

Conclusion

The SEBI rules are a big step in the right direction toward maintaining a fair and open environment for REITs in India. SEBI has established a path for REITs to comply with regulatory obligations while maximizing the benefits for their investors by outlining several ways to achieve the minimum public unitholding. These procedures and the monitoring system will guarantee the REITs’ financial stability and increase investor faith in the industry.

Frequently Asked Questions

What is MSM REIT?

SEBI envisages the creation of ‘Medium, Small, and Micro,’ or MSM REITS, which will enable you to invest in such properties with a minimum investment amount of ₹10 lakh. The sponsor and investment manager should have a net worth of at least Rs 20 crore and Rs 10 crore, respectively.

What are the two types of REIT?

The two main REIT types are equity and mortgage REITs, commonly known as mREITs. Equity REITs generate income through the collection of rent on and from sales of the properties they own for the long term. REITs invest in mortgages or securities tied to commercial and residential properties.

What are the benefits of a REIT?

REITs offer investors the benefits of real estate investment and the ease and advantages of investing in a publicly traded stock. REITs have historically provided investors with dividend-based income, competitive market performance, transparency, liquidity, inflation protection, and portfolio diversification.

Manner-of-achieving-minimum-public-unitholding-–-REITs

Read our Article:All About Real Estate Investment Trusts in India

References

  1. https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpiFilter=yes

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