Real estate investment trusts, including small and medium REITs, and infrastructure trusts may be permitted to use interest rate derivatives to hedge, locked-in units may be transferred within sponsor groups, fixed deposits can be included for cash balances while computing leverage and REITs may be able to invest in liquid mutual funds, according to a consultation paper by the Securities and Exchange Board of India (SEBI).
Unlisted shares investment restrictions
The draft proposals on REITs and InvITs have been issued to facilitate business and protect investors.. The paper also proposes that REITs cannot invest in unlisted equity shares other than those of holdco and special purpose vehicles.
Under ease of doing business, one of the first proposals pertains to locked-in units of sponsor and sponsor group of REITs and InvITs. The paper has proposed that locked-in units held by a sponsor and sponsor group may be transferred within the sponsor group entities subject to the condition that lock-in on such units shall continue for the remaining period with the transferee. This puts them on par with listed companies.
Representations were made to the regulator to permit REITs and InvITs to use rupee interest rate derivatives for hedging. Currently, the provisions do not allow it. The paper has proposed permitting InvITs, REITs, and SM REITs to participate in interest rate derivatives, forward rate contracts, and interest rate swaps, solely to hedge an underlying interest rate risk.
Currently InvITs need a track record of six continuous distributions if their consolidated borrowing has to exceed 49 per cent of the value of the assets. InvITs represented that it takes 2 years to achieve the distribution track record requirement and therefore more time to access debt capital. The consultation paper has removed the wait time for meeting this requirement with the provision that it should be achieved across minimum 6 quarters.
The draft paper also allows fixed deposits to be included as cash and cash equivalents when computing leverage for REITs, InvITs and SM REITs.
With regard to assets that are categorised as infrastructure assets or real estate assets, there is some confusion in their definitions and the consultation paper noted that it poses restrictions as to where REITs can invest.
The paper clarified that REITs can invest in assets that fall under the ‘infrastructure’ category, provided the aim of holding such an asset was to earn fixed rental income from leasing it out and not assuming risk related to its operation.
Investor protection
To harmonise regulations between InvITs and REITs and as an investor protection measure, the draft paper proposes that REITs shall not be permitted to invest in unlisted equity shares of companies other than Holdco and, or SPV as part of real estate or property investments. For existing investments in unlisted shares, a glide path would be provided to dispose of them.
The paper has also recommended allowing REITs to invest in liquid mutual funds under permitted list of investments, but not more than 20 per cent of the value of its assets.