A couple of ago back Securities and Exchange Board of India (SEBI) came out with a consultation paper proposing several changes to the regulations for real estate investment trusts and infrastructure investment trusts.

They were classified under two heads – measures for ease of doing business (compliance) and for investor protection. businessline delves deeper into the proposals to focus on the key ones and their impact on the sector

One of the proposals pertains to permitting transfer of locked-in units among sponsor and sponsor groups of REITs and InvITs. How will it result in ease of doing business?

Under current regulations units held by the sponsor and sponsor groups of REITs and InvITs, including multiple sponsors, are subject to lock-ins for a maximum of three years and there is no provision for inter-se transfer of such locked-in units, among sponsors and sponsor groups.

Permitting the transfer of such locked-in units within the sponsor group entities brings in more flexibility in the regulations. It also brings parity with the regulations governing inter-se transfers in corporates.

All categories of REITs and InvITs have been allowed to hedge their exposures with interest rate derivatives, forward rate contracts and interest rate swaps. How does this help?

Infrastructure projects are long gestation projects, and they require extended financing durations. InvITs borrow funds up to 49 per cent or 70 per cent of the value of their assets. This exposes InvITs to risk associated with fluctuations in interest rates, which will affect their repayments and cash flows and thus impact unitholders’ returns.

Interest rate derivatives such as swaps, futures and options give them the instruments to hedge against this risk. In fact, mutual funds have been allowed to use interest rate derivatives, including forward rate contracts and interest rate swaps. With derivatives, InvITs can reduce the negative impact on the cash flows they generate and distribution to the unitholders when interest rates are high.

Fixed deposits can be part of cash and cash equivalents when computing leverage of REITs, SM REITs and InvITs. What are the implications?

REITs and InvITs, together with their holdcos and SPVs can borrow up to 49 per cent or 70 per cent of their assets, net of cash and cash equivalents. Investments in overnight mutual funds with maturity of one-day are considered cash and cash equivalent.

However, REITs and InvITs usually park cash in fixed deposits and currently they are not considered when computing the leverage. This gives them more room to take on debt as FDs can be converted to cash whenever required either through a premature termination or withdrawal.

The consultation paper has expanded the asset base that REITs can add to their portfolio. Why has this been done?

At present there is considerable overlap and confusion in the definition of infrastructure assets and real estate assets. REITs, by definition, cannot invest in assets that are classified as infrastructure by the MoF.

With respect to assets such as warehouses, hotels and data centres, they are classified as infrastructure if they meet certain investment criteria.

This limits the scope of assets that can be held by a REIT. The consultation paper has proposed changes to the regulations so that assets falling under the ‘infrastructure’ category can be considered real estate assets provided the objective of holding such an asset is to earn fixed rental income from leasing out such asset.

This expands the range of assets that can be held by REITs in their portfolio.

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