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In a significant move aimed at enhancing corporate governance standards within the financial markets, the Securities and Exchange Board of India (SEBI) has unveiled a series of new regulations that introduce novel provisions for Real Estate Investment Trusts (REITs). These regulations bring about a transformative shift by empowering unitholders of REITs with special privileges, including the ability to nominate representatives to serve on the boards. Additionally, SEBI has introduced a pioneering concept in the form of self-sponsored REITs, further reinforcing the evolving landscape of real estate investment.
Under the revised rules, unitholders who collectively hold a minimum of 10 percent of the total outstanding units of a REIT are now entitled to nominate a director to sit on the board of investment managers. This change aimed at ensuring equitable representation and pro-rata rights for all unitholders, granting them a say in key decision-making processes. Furthermore, SEBI's directive mandates that any director nominated by unitholders must abstain from voting on transactions involving the director or the unitholder who endorsed their nomination, thereby upholding transparency and mitigating potential conflicts of interest.
The embrace of these regulations comes as a response to the growing interest of retail investors in Infrastructure Investment Trusts (InvITs) and REITs. Until now, the regulatory framework did not explicitly provide a channel for unitholders to participate in decisions made by investment managers. Nevertheless, significant investors in these trusts have historically exerted influence over investment choices by nominating directors to investment manager boards.
In a bid to preserve the alignment of interests throughout the lifespan of investment vehicles, SEBI's regulations now mandate that InvIT and REIT sponsors maintain a certain minimum unitholding over a reducing timeframe. This holding must be unencumbered and locked-in, ensuring sustained commitment from sponsors. The new rules stipulate that collectively, sponsors must hold at least 15 percent of total units for three years from the initial unit offering's listing date. Additionally, any sponsor holding exceeding 15 percent will be subject to a one-year holding requirement from the initial offering.
To encourage the emergence of mature, independent, and professionally managed investment managers and to provide sponsors with an alternative exit option, SEBI introduces the concept of self-sponsored investment managers for REITs. Eligibility for this transition is contingent on specific criteria, such as the REIT being listed for a minimum of five years, at least one sponsor disassociating after a five-year tenure, and the investment manager meeting certain net worth thresholds.
With regard to stewardship, SEBI stipulates that any unitholder possessing a minimum of 10 percent of total outstanding REIT units must prioritize the REIT's best interests. This includes developing a comprehensive stewardship policy, addressing conflicts of interest, and implementing voting policies. Regular monitoring of the REIT and its affiliated entities is also mandated.
REITs were introduced in India as a vehicle for investors to access real estate projects while enjoying risk diversification through pooled arrangements. Typically, REITs allocate significant investments to completed, income-generating real estate assets. SEBI's recent regulatory amendments underscore the ongoing evolution of the investment landscape and its commitment to promoting investor participation, accountability, and sustainable growth.
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