Real estate investment trusts (REITs) and Infrastructure Investment Trusts will likely to find it difficult to undertake mergers and acquisitions and get new sponsors under the amended minimum unitholding requirement for sponsors brought in by SEBI.

On Wednesday, the board of Securities and Exchange Board of India approved the proposal whereby sponsors of REITs and InvITs would be required to hold a certain minimum stake in the investment vehicles on a reducing scale for perpetuity. These units will be locked-in and will also be unencumbered.

Currently, there is a 15 per cent unit holding lock-in for at least three years. Under the amended regulations, it starts at 15 per cent for up to three years, then reduces over time with the lower of 1 per cent of unit capital or ₹1,000 crore after 20 years.

While SEBI intents to ensure skin in the game and that sponsor’s interests are aligned with that of the unitholders, industry circles feel that it is a case of overkill and not warranted. When the REIT regulations were originally framed by SEBI in 2014, there was a provision for a 5 per cent of sponsor unitholding to be locked in, which was eventually removed in 2019 on extensive representations from the industry, who felt that they should be treated on par with corporates on the equity side.

“These minimum unitholding norms were not required for ensuring investment continuity and requisite corporate governance, the SEBI REIT Regulations already have enough belts and suspenders in that regard,” said Nikhil Naredi, Partner at law firm Shardul Amarchand Mangaldas.

The lock-in restrictions are likely to put a spanner in any M&A transaction, and if a new sponsor wants to come in. The rider on the lock-in units being unencumbered means that the sponsors cannot use the units for leverage.

“The objectives are good, but SEBI need not have done all this to achieve it,” Naredi added. A senior executive with a REIT, who did not want to be named, said, “the kind of regulations they are bringing in, they are treating us like a banking product.”

All the REIT players are expected to come together next week and contemplate their next course of action.

Good for Investors

Industry experts, however, feel that the regulations are good from the point of view of investors, who would be comfortable  of knowing that the sponsor has been tied to the REIT or InvIT for a long time.

“From an investor perspective this regulation will translate into skin in the game of the people who most understand the investment vehicle, whether it is in relation to the quality of assets, the tenants or the lease terms,” said Vivek Rathi, Director, Research at Knight Frank India.

He said that while the lock-in provision could delay the sponsor’s monetisation intention, the continued presence of the sponsor with the REIT and InvIT would comfort the unitholder. “If you want to monetise an asset and exit in the public market, this is what the regulator wants,” he added.

The stringent provisions are, however, not expected to deter more REITs and InvITs from entering the market. “REITs will come because of the scale it provides for investment and the kind of participation it invites, especially from global investors,” Rathi said.

It is just one additional element in terms of compliance.