New guidelines in the works as SEBI releases proposals for REITs and InvITs subordinate units

The Securities and Exchange Board of India (SEBI) is considering the introduction of a framework for the issuance of subordinate units by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to sponsors and their associates. The regulatory body has also proposed a framework for unit-based employee benefits (UBEB) within the context of REITs and InvITs. SEBI is currently seeking public comments on these proposals until December 29.
Under the proposed framework, SEBI suggests that subordinate units can only be issued to the sponsor, its associates, and the sponsor group. These units should have inferior voting rights compared to ordinary units and may be issued to eligible entities in the initial offer or in any subsequent offerings. SEBI recommends that the issuance of subordinate units post-initial offer requires prior approval from 75% of unit-holders by value, with sponsors and related entities abstaining from voting on such matters.
Moreover, the regulator suggests that subordinate units and ordinary units must have separate International Securities Identification Numbers (ISINs) and should not be considered for mandatory minimum unit-holding requirements applicable to sponsors. SEBI also recommends defining and specifying the entitlement date, including performance benchmarks for the conversion of subordinate units to ordinary units, in the offer document. It suggests permitting a one-time extension in the entitlement date for a maximum period of one year under certain conditions. SEBI proposes a minimum one-year gap between the issuance of subordinate units and the entitlement date or event for conversion.
Presently, REITs and InvITs are allowed to issue subordinate units exclusively to sponsors and associates. However, there is currently no established framework detailing the mechanism for the issuance of subordinate units.
In addition to the proposed framework for subordinate units, SEBI has put forth suggestions for unit-based employee benefits (UBEB). According to these proposals, the manager of a REIT or the investment manager of an InvIT can offer UBEB schemes for their employees based on the units of the REIT or InvIT. The implementation of such a scheme would involve the creation of a separate Employee Benefit Trust (EB Trust) by the manager or investment manager. Units held by the EB Trust should be utilized exclusively for providing unit-based employee benefits, with the trustee of the EB Trust ineligible to vote on units of the REIT or InvIT held by it. The EB Trust is prohibited from transferring or selling units, except for providing benefits to the employees of the manager or investment manager.
Overall, these proposed frameworks aim to establish clear guidelines and mechanisms for the issuance of subordinate units and unit-based employee benefits within the REIT and InvIT structures, providing greater clarity and regulatory oversight in these areas.

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New guidelines in the works as SEBI releases proposals for REITs and InvITs subordinate units

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