Sebi Proposes Special Rights for Unitholders to Enhance Governance in REITs and InvITs

The Securities and Exchange Board of India (Sebi) has put forward a consultation paper on May 16, suggesting the provision of special rights to certain unitholders of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Currently, unitholders of these trusts do not have superior voting rights. However, some REITs and InvITs permit investors who hold a specific percentage of units to nominate directors on the board of the manager/investment manager of these trusts.

REITs and InvITs are established by sponsors, managed by investment managers, and overseen by trustees who safeguard the interests of the unitholders. Although these trusts are not designed to grant special privileges to any particular group of unitholders, certain privileges are extended, through offer documents or placement memoranda, to instill confidence among large institutional investors or those with a significant minority stake. Recognizing the practical necessity of these privileges, Sebi has proposed that they should not be limited to institutional investors alone but should also be available to other investors. Therefore, comments have been invited on whether special rights, such as the right to nominate directors on the board of the manager/investment manager of REITs/InvITs, should be permitted and, if so, what percentage of units would be required for investors to have a say in the composition of the board or the operation of the trusts.

Two options have been proposed: Firstly, investors would be allowed to nominate directors on the board of the manager/investment manager for every ten percent of the units they own. Secondly, investors would be permitted to nominate a member to the Unitholders Council for every ten percent of the units they own. Investors collectively holding a minimum of 10 percent could also join forces to exercise these privileges, either by nominating a director or a council member.

The paper highlights the reason behind the second option, stating that the first option may result in overly large boards for investment managers. According to REIT and InvIT regulations, at least half of the board should comprise independent directors. If each unitholder exercising their ten percent right nominates a director, it would result in 10 directors, in addition to the required 10 independent directors, making a total of 20 directors on the board. The paper cautions that having a very large board could lead to difficulties in effective communication, engagement, and decision-making, rendering it ineffective and bureaucratic. Thus, the second alternative of a Unitholders Council has been proposed.

In the Unitholders Council, each member would have one vote for every 10 percent of their holding represented. Decisions would be made based on the simple majority of present council members. For instance, if three members representing 20 percent, 30 percent, and 20 percent holdings respectively are present, a matter would require at least four votes for a decision.

Any matter to be decided by the board of the investment manager would first be deliberated by the board. If approved, it would then be presented to the council. In the event that the council does not approve, the matter would be put to vote at the unitholders’ meeting, along with recommendations from the board and the council. Prior approval from both the board and the council is necessary for any matter to be presented at the unitholders’ meeting.

The Unitholders Council would be considered an insider under SEBI (Prohibition of Insider Trading) Regulation 2015. Council members would also be responsible for ensuring that their decisions align with the regulations governing REITs and InvIT.

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