Abstract
Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) appear to be a boon to new age investors. However, as up-and-coming investment options in India, certain rules and regulatory frameworks are required to govern them. Synonymous with mutual funds, these trusts are also governed by the Securities Exchange Board of India (SEBI) since 2014. A relatively novel topic, it can track its source back to similar investments in the USA, which has experienced a market cap of 96% as of 2019.
This Blog Post aims to outline the laws that form the regulatory framework of InvITs and REITs in India by analysing the InvITs Regulations 2014 and REITs Regulations 2014. The Blog Post further discusses the roles and responsibilities of certain key parties to these investments and deliberates upon the SEBI mandated guidelines. Furthermore, it analyses the pros and cons of these investments while painting a global picture of these investment opportunities. Lastly, the Blog Post concludes by suggesting the possibility of growth in this sector of investments by elucidating the Indian InvITs and REITs market.
Introduction
India is one of the fastest-growing economies in the world. However, it is no secret that to keep pace with the economies of developed countries, India needs to open its horizons to new age investments like InvITs and REITs. SEBI first introduced InvITs and REITs as alternative investment funds in 2014.
According to Regulation 2(1)(za) of the InvITs Regulations 2014, ‘InvIT or Infrastructure Investment Trust’ shall mean the trust registered as such under these regulations. InvITs are similar to mutual funds that pool money from investors to own and operate operational infrastructure assets. They offer regular income and long-term capital appreciation. InvITs can be public listed or private.
According to Regulation 2(1)(zm) of the REITs Regulations 2014, ‘REITs or Real estate Investment Trust’ shall mean a trust registered as such under these Regulations.REITs are investment trusts, like mutual funds, that own and operate real estate properties regulating income and capital appreciation on the investment. They help investors diversify their portfolios as well. REITs are public listed.
Key Parties of InvITs
As per clause 2(1)(zk) of the InvITs Regulations 2014, parties to the InvITs shall include Sponsor(s), Investment Manager, Project Manager(s) and Trustee. To discuss this in greater detail, one can look at their roles and responsibilities.
1. Sponsor:
As per clause 2(1)(zz) of the SEBI (Infrastructure Investment Trusts) Regulations 2014, a ‘sponsor’ refers to “any company or LLP or body corporate which sets up the InvITs and is designated as such at the time of application made to the board, and in case of PPP projects, shall mean the infrastructure developer or a special purpose vehicle holding the concession agreement.” Regulation 12(1) of the InvITs Regulations 2014 gives a primary right to the Sponsor to set up the InvIT and appoint a Trustee of the InvIT. As per Regulation 12(3), sponsors are mandatorily required to hold a minimum 15% stake of the total units in the InvIT for at least three years from the date of the listing of such units.
As per clause 2(1)(zzb) of the SEBI (Infrastructure Investment Trusts) Regulations 2014, ‘trustee’ means “a person who holds the InvIT assets in trust for the benefit of the unitholders, following the regulations”. The key responsibility of a trustee is holding the assets of an InvIT in trusteeship to safeguard the interests of the unitholders. Furthermore, a trustee must ensure timely distribution of dividends to unitholders and oversee the activity of the InvIT managers.
As per clause 2(1)(zf) of the SEBI (Infrastructure Investment Trusts) Regulations 2014, an ‘investment manager’ means “a company or LLP or body corporate which manages assets and investments of the InvIT and undertakes activities of the InvIT as under Regulation 10”. The investment manager of the InvIT is responsible for ensuring that existing investments of the InvIT are providing returns as per expectations.
As per clause 2(1)(zp) of the SEBI (Infrastructure Investment Trusts) Regulations 2014, ‘project manager’ means “the person designated as the project manager by the InvIT, responsible for achieving execution of the project as satisfied under regulation 11 and in case of PPP projects, shall mean the entity responsible for such execution and achievement of project milestones in accordance with the concession agreement or any other relevant project document.” The key responsibilities of a project manager include ensuring smooth operations in the case of completed projects of the trust and timely delivery of under constructed projects.
Some of the mandatory regulations for InvITs in India are:
- An InvIT must invest at least 80% of its total assets in completed infrastructure projects capable of generating income. The remainder of the assets up to a limit of 20% held by the InvIT can be invested in under-construction infrastructure projects, and various SEBI approved Equity, Debt and Money market instruments. (Clause 18(5) of the InvIT Regulation 2014).
- InvITs must distribute at least 90% of their income to their unit holders as dividends on a bi-annual basis.
- The InvITs can raise funds by way of IPO, PP, preferential placement, rights issue, bonus issue, offer for sale {Clause 14(2) & (4) of the InvITs Regulation 2014}.
- It is mandatory for units of all InvITs to be listed on a recognised stock exchange, having nationwide trading terminals, whether publicly issued or privately placed. (Clause 16(1) of the InvITs Regulation 2014).
Key Parties of REITs
As per clause 2(1)(zc) of the REITs Regulations 2014, parties to the REIT shall include Sponsor(s), Re-designated Sponsor(s), Manager and Trustee.
1. Sponsor:
As per clause 2(1)(zt) of the SEBI (Real Estate Investment Trusts) Regulations 2014, a ‘sponsor’ means “any person who set up the REIT and is designated as such at the time of application made to the Board”. The sponsor is responsible for setting up the REIT and for the appointment of a Trustee. Further, the sponsors should collectively hold 25% of REIT for at least 3 years and 10% thereafter.
2. Re-designated Sponsor:
As per clause 2(1)(zl), a ‘re-designated sponsor’ means “any person who has assumed responsibility of the sponsor as provided under Regulation 11 from the person as designated under clause (zt) or from any re-designated sponsor thereafter”.
3. Trustee:
As per clause 2(1)(zv) of the SEBI (Real Estate Investment Trusts) Regulations 2014, a ‘trustee’ means “a person who holds the REIT assets in trust for the benefit of the unitholders, following these regulations”. A trustee oversees the activities of REIT. Further, a trustee should be registered with SEBI as a debenture trustee and independent of other parties associated with the REIT.
4. Manager:
As per clause 2(1)(w) of the SEBI (Real Estate Investment Trusts) Regulations 2014, a ‘manager’ means “a company or LLP or body corporate in India which manages assets and investments of the REIT and undertakes operational activities of the REIT”.
Additionally, key SEBI mandated criteria that REITs in India need to fulfil in order to qualify are as follows:
- At least 80% of the investment made by a REIT needs to be in commercial properties that can be rented out to generate income. The remaining assets of the trust (up to the 20% limit) can be held in the form of stocks, bonds, cash or under construction commercial property.
- At least 90% of the rental income earned by the REIT has to be distributed to its unitholders as dividends or interest.
- Stock market listing of REIT is mandatory.
The Indian Market
The InvITs and REITs are established as trusts under the Trusts Act, 1882. The trust deed is registered in India under the Regulation Act, 1908 and the certificate for registration is obtained from SEBI.
The Government of India has launched these InvITs and REITs to bring long term capital into the country and increase private participation in infrastructure and real estate. However, distribution by InvITs and REITs are based on NDFC (Net Distributable Cash Flows), unlike companies where dividends are based on profits. These distributions are declared and made at least once every six months for publicly offered InvITs and REITs and once a year for private placed InvITs.
India currently has three REITs listed with SEBIwhich are as follows:
1. Embassy REIT (started in 2017) – Reported a 12% rise in net operating income (NOI) to Rs. 2,032 crore on a Y-O-Y basis. And its revenue grew 10 % to Rs. 2,032 crores in the same period. It is Asia’s first as well as the largest REIT in terms of area.
2. Brookfield REIT (2019)- Its NOI rise nearly 4% to around Rs. 170 crore for Q-2 2021 on a Y-O-Y basis. It also extended dividend pay-out worth Rs. 181.7 crore to unitholders.
3. Mindspace REIT (2020) – Its consolidated leasable area is 20.2 MSF. It has a strong portfolio of office space across Tier-1 cities, such as Mumbai, Pune, Hyderabad, and Chennai. NOI of over Rs. 358 crores during H1 2021 on a Y-O-Y basis.
There are currently 17 registered InvITs in India, becoming investors’ favourite. Two public listed InvITs,India Grid Trust and IRB InvITs, have given returns of 56% and 83%, respectively, in the past year.Power Grid InvIT which was listed in May 2021, has already delivered over 20% return so far.IRB InvIT, the first publicly listed InvIT, has seen stellar growth, wherein the Financial Year 2020, over Rs. 7800 crore was received in cash inflows and after deducting outflows of over Rs. 1,743 crore, the net distributable cash flow was just over Rs. 6,000 crores. Now,as per SEBI regulations, the trust is required to mandatorily distribute at least 90% of the NDCF to the unitholders. So, IRB InvIT would have distributed 90% of Rs. 6,068 crores to its unitholders in the Financial Year 2020. It is relevant to note that this is an example of only one InvIT, and the number is only going up.
Global Perspective
Although InvITs and REITs are a relatively new phenomenon in India, the same has seen unprecedented growth worldwide. InvTs and REITs were introduced much earlier in the following countries: the US in the 1960s, Japan in 2000, the United Kingdom in 2007, Singapore in 1999 and Australia in 1970. As of 2019,US REIT’s market capitalisation was at 96% of the total real estate market capitalisation.In Singapore, Japan, and Malaysia, it was at 55%, 51% and 42%, respectively.
It is important to note that as of 2021, the USA’s total market cap of REITs and business trusts is at US $2.4 trillion.There are now over 800 listed REITs globally.The USA is a mature market for REITs, with over 28% of global REITs listed in its exchange, accounting for 63% of the global REIT market capitalisation.
Benefits and Limitations: Concluding Remarks
The attraction towards investment in InvITs and REITs is evident from their alluringbenefits. InvITs and REITs allow investors to diversify their investments.
InvITs allow investors to assume part ownership in infrastructure projects, which helps diversify investment through exposure to a new asset class−Infrastructure Projects. On the other hand, REITs provide a unique opportunity to invest in different Real Estate Projects, further inventing a new asset class.
Additionally, a regular income can be appropriated by investing in InvITs and REITs. InvITs must mandatorily distribute at least 90% of the income through dividends and interest pay-outs on bi-annual payments. In REITs, 90% of distributable cash flows must be distributed with unitholders, which ensures regular income to investors in the form of dividends.
It cannot be negated that investment in InvITs and REITs are comparatively easier. SEBI provides InvITs and REITs as a transparent and hassle-free investment, whereby InvITs and REITs are professionally managed by designated managers making it relatively non-tumultuous for the investor. With an exponentially increasing market for InvITs and REITs, units of InvITs and REITs can now be traded on stock exchanges like shares. Thus, in a scenario where the price of units goes up, the same can be sold at a profit, and capital gains can be received.
Although InvITs and REITs come with their fair share of advantages, a few fundamentallimitations cannot be unheeded. Income generated by InvITs depends upon two major factors: tariff and usage. An alteration in either of the two components can lead to an increase or decrease in the income generated by the project. Changes in government regulations or interventions can result in a change in tariffs; for example, if the government mandate cancels the toll on a road, the tariff collection would go down to zero. Further, a major limitation about investment in REITs is that they are presently allowed to invest only in commercial properties.
It cannot be dismissed from consideration that there are only two publicly listed InvITs in India, hence, limiting the choice of investment. Even in the case of REITs, there are only three REITs and one international REIT fund of funds in India, thereby significantly limiting investors’ options. Moreover, market participation by buyers and sellers is relatively low in InvITs and REITs. Hence, it is difficult to sell an InvIT or a REIT unit at a reasonable price in case of an emergency.
Evidently, the InvITs and REITs market in India is relatively nascent. However, during the past years, even during the pandemic, the market for InvITs and REITs has seen considerable growth. REITs and InvITs might be a relatively new form of investment; yet their appeal is ever increasing. Indeed, in the current scenario, InvITs and REITs provide investors with beginner’s advantage.
About the Authors
Mr. Achal Gupta is a Partner at Aequitas Legum, New Delhi.
Ms. Annie Rais is an Associate Partner at Aequitas Legum, New Delhi.
Ms. Alizaah Rais is an Advocate at Aequitas Legum, New Delhi.
Ms. Annie Rais and Ms. Alizah Rais worked under the guidance of Mr. Gupta.
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Akanksha Goel
Senior Editor: Hamna Viriyam
Associate Editor: Charvi Devprakash
Junior Editor: CH Sriniwas
Preferred Method of Citation
Achal Gupta, Annie Rais and Alizaah Rais “Legal Regime regulating InvITs and REITs as a New Age Investment Option in India: An Analysis” (IJPIEL, 21 March 2022)
<https://ijpiel.com/index.php/2022/03/21/legal-regime-regulating-invits-and-reits-as-a-new-age-investment-option-in-india-an-analysis/>
References
[1] https://www.sebi.gov.in/legal/master-circulars/nov-2021/master-circular-for-real-estate-investment-trusts-reits-_54300.html
[2] https://www.sebi.gov.in/legal/master-circulars/nov-2021/master-circular-for-infrastructure-investment-trusts-invits-_54302.html
[3] https://m.economictimes.com/markets/stocks/news/reits-are-making-a-powerful-comeback-in-post-lockdown-india/articleshow/87911473.cms
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