SEBI asks REITs and InvITs to hold securities of Special Purpose Vehicles (SPVs), Holding Cos in demat

Swetha Dhinesh

30 May, 2024

Infrastructure and real estate have been regarded as India’s “sunshine sector” since the turn of the century and have significantly contributed to the development of one of the world’s fastest-growing economies. A country’s total development is accelerated by its well-developed infrastructure. As a result, the capital base that is available for the expansion of important economic sectors as well as for the economy’s continuous growth is increased. It also makes it easier for a consistent influx of private and international investments.

Investment managers of Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) have been urged by the market regulator to make sure that holding company and special-purpose vehicle (SPV) assets are stored in dematerialised form.

The managers of the trusts have until June 30, 2023, to implement the adjustment if securities are held in physical form. Investors are issued shares of holding companies or Special Purpose Vehicles through which InvITs and REITs keep their assets. On May 22, the Securities and Exchange Board of India (Sebi) published two orders on the dematerialisation of securities, one for InvITS and one for REITs.

Special Purpose Vehicle

A Special Purpose Vehicle (SPV) is a distinct legal body that is typically established for a particular, well-defined and legitimate purpose. It serves as the primary parent company’s bankruptcy remote. Because its operations are limited to acquiring and financing particular assets and projects, the Special Purpose Vehicles can fulfil its obligations in the event of a company’s bankruptcy.

What is a Holding Company?

A holding company is a business that doesn’t engage in any active business initiatives, operations, or other responsibilities for itself. Instead, it exists so that it can own assets. Therefore, the business does not engage in the purchase or sale of any goods or services. Instead, it was established so that it could take over one or more businesses.

Demat Account

Before learning about the dematerialisation procedure, it is crucial to understand the Demat account concept because you can only dematerialise your physical shares by opening a demat account in trade. Demat, or dematerialisation, is the process of converting physical securities into electronic form. 

Because of this, a trader can hold, transfer, and transact securities using a demat account without having to deal with physical securities. As a result, trading is now a lot faster, safer and more effective way to execute trades and store assets.

Mutual funds, bonds, and stock assets can all be managed with a demat account. It is a lot like having a bank account. The sole distinction is that a demat keeps securities, such as shares, bonds, or debentures, rather than money in a bank account. When you have a Demat account, you do not need to take physical shares around with you.

What is dematerialisation?

The process of dematerialisation involves converting an investor’s physical certificates into an equivalent number of securities in electronic form and crediting those securities to the BO’s account with his depository participant.

New Circulars

The regulatory authority issued two new circulars on the Dematerialization of securities of Hold Cos and Special Purpose Vehicles held by Infrastructure Investment Trusts (InvITs) and the Dematerialization of securities of Hold Cos and Special Purpose Vehicles held by Real Estate Investment Trusts (REITs). New circulars of SEBI are combined and discussed below:

1. The SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) state in Regulation 14(4)(r) that the units of an InvIT may only be given to all applicants in dematerialised form.
2. According to the circular on REITs, Regulation 14(18) of the SEBI (Real Estate Investment Trust) Regulations, 2014 (“REIT Regulations”) mandates that all applicants receive REIT units solely in dematerialised form.
3. It has been agreed that InvITs shall henceforth retain the securities of Hold Cos and Special Purpose Vehicles in dematerialised form only in order to promote the dematerialisation of securities, increase ease of doing business, and improve transparency in the transactions of Hold Cos/Special Purpose Vehicles stocks. According to Sebi’s ruling, the Investment Manager of the InvIT must ensure the same. The justifications offered for the dematerialisation of REIT units were similar.
4. In addition, the Investment Manager of the InvIT and REITS are instructed to hold the dematerialised form of securities of the InvIT’s Hold Cos and Special Purpose Vehicles on or before June 30, 2023, for any existing securities holdings by InvITs in Hold Cos and Special Purpose Vehicles in physical form.
5. The Securities and Exchange Board of India Act, 1992’s Section 11(1), as well as Regulation 33 of the InvIT Regulations and Regulation 33 of the REITs, grant the authority to issue this circular. The responsible authority has given its approval for the release of the circular. 
6. Before allowing self-sponsored REITs and InvITs, specific rights for some unitholders of these entities were first proposed. The former provides more extensive asset-management capabilities and enables a different exit for sponsors. The latter allows all investors to use an option currently available to select major investors.
7. Another proposed element is placing fractional real estate platforms under the legal framework of micro, small, and medium REITs. The larger fractional real estate players applauded this notion, but they will work to have a provision that requires sponsors to own 15% of the holding company, or Special Purpose Vehicleschanged.

Benefits and Importance of Dematerialization

Many investors still own physical share certificates from purchases made prior to 1996. However, SEBI has mandated that the dematerialisation process be used to transform the physical shares into electronic form. These consist of the following:

Safety: Dematerialisation reduces the possibility of shares being stolen, falsified, or misplaced, hence enhancing the holding’s security. Theft is no longer an issue because they are kept in safe depositories.

Convenience: Due to the electronic nature of dematerialised shares, issues with storage and maintenance are no longer an issue. You won’t have to worry about misplaced or damaged credentials any longer.

Accessibility: All sharing records are kept online and electronically. Because of this, you can access dematerialised shares practically anytime and almost anywhere.

Flexibility: Dematerialisation boosted access for small investors by increasing flexibility. Now, there are no more limitations on the number of shares that can be sold or purchased.

How can one dematerialise securities or turn physical holdings into electronic holdings?

One must complete a DRF (Demat Request Form) that is provided with the deposit participant and submit it along with the physical certificates that are to be dematerialised in order to dematerialise physical securities. For each ISIN, a separate DRF must be filled out. The following describes the entire dematerialisation process:

1. Give your DP your certificates for dematerialisation; 
2. The DP notifies the depository of the request through the system.
3. DP delivers the certificates to the Issuer Company’s Registrar.
4. The Registrar confirms the depository’s request for dematerialisation.
5. Following the dematerialisation of the certificates, the Registrar changes accounts and notifies the depository that the process is complete.
6. The depository notifies the DP and adjusts its accounts.
7. The investor’s demat account is updated by DP.

What steps must be taken in order to sell dematerialised securities?

Like buying and selling physical securities, trading in dematerialised securities follows a similar process. The distinction is in how securities are delivered (in a sale) and received (in a purchase).

Conclusion

The overall goal of modernising and bolstering India’s securities market infrastructure is supported by SEBI’s decision to require the dematerialisation of assets owned by REITs and InvITs. It intends to improve the operation of REITs and InvITs, which are well-liked investment vehicles for real estate and infrastructure assets, by increasing efficiency, transparency, and investor confidence.

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