Sebi proposal introduces exit option challenge for real estate investment trust sponsors

The Securities and Exchange Board of India (Sebi) has proposed a new regulation that could create difficulties for sponsors of real estate investment trusts (REIT) and infrastructure investment trusts (InvIT) seeking an exit option.

Under the proposed amendment, sponsors of REITs and InvITs will be required to maintain a minimum unit holding throughout the lifespan of the investment vehicles, with a reduced b scale. Sebi aims to ensure continuous alignment of unit holders’ interests with the sponsors of REITs and InvITs.

Currently, Sebi regulations stipulate that sponsors must hold a minimum of 15% unit holding for at least three years from the date of listing the units.

The proposed changes are part of a broader set of amendments being introduced by Sebi following its board meeting on Wednesday.

In addition, Sebi has decided to grant board nomination rights to unit holders of REITs and InvITs. The regulator now proposes that unit holders with 10% or more unit holding, either individually or collectively, can nominate members to the board.

Real estate industry experts view these regulatory decisions as timely and aligned with the goal of protecting the interests of minority unit holders, while enhancing transparency and accountability.

In India, there are currently four REITs listed on the stock exchanges. These investment vehicles have gained popularity among retail investors as a means to participate in the growing commercial real estate market.

Anuj Puri, Chairman of Anarock, expressed his support for the proposed change in sponsors’ minimum unit holdings, emphasizing that it would greatly enhance accountability. He also praised the move to grant significant unit holders nomination rights, as it would give investors better control over their investments.

However, Sebi’s proposal to require sponsors to maintain their investment may be seen as counterproductive, considering that REITs and InvITs are often regarded as long-term asset monetization vehicles.

Blackstone, a prominent private equity firm and sponsor of Embassy Office Park REIT and Nexus Select Trust, has been gradually reducing its stake in Embassy REIT over the past four years.

Samantak Das, Chief Economist, and Executive Director at JLL, dismissed concerns about the regulation, stating that having “skin in the game” is beneficial. He believes that this requirement will ensure active interest in the success of investment vehicles.

Apart from these changes, the Sebi board has also proposed introducing a provision for self-sponsored investment managers for REITs and InvITs. This would enable mature and independent investment managers to emerge and offer an additional exit option for the sponsor. However, the minimum unit holding requirement would still apply in this case.

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