To safeguard investors' interest,new norms for the launch of Real Estate Investment Trusts (REITs) in India will require such bodies to take adequate insurance cover for their realty assets and bar them from promising any guaranteed returns.
The detailed norms, to be made public soon, will also contain strict provisions for any misleading claims and will require them to a strict 10-point code of conduct for fair business practices.
Besides, any change in the sponsor group of these Trusts, which will be listed on stock exchanges and their units can be traded like any other security, would need approval from a vast majority of unit-holders. Failing that, they would need to be given an exit option from the new sponsor.
At the same time, regulator Sebi has decided to keep the disclosure requirements and overall regulatory compliance mechanism simpler for REITs, while registration fees would also be on lower side vis-a-vis other instruments to raise funds from the capital markets.
The new REIT regulations, which were cleared by Sebi's board on August 10, would be notified soon after necessary fine-tuning, a senior official said.
The new norms would allow formation of REITs to invest largely in completed and income-generating real estate assets and the subsequent listing of such trusts with an initial public offer (IPO) of at least Rs. 250 crore. The value of total assets of such trusts would need to be Rs. 500 crore, while at least 25% of total number of units would need to be offered to the public investors.
These Trusts would not be allowed to invest in vacant land or agriculture land, while any deviation from their stated investment objective would need clearance from their unit-holders, as per the norms finalised by Sebi.
The sponsor or its associates would also need at least five years of experience in development of real estate on fund management in real estate industry, while the new norms also prescribe eligibility conditions for manager of the Trust.
The manager would need to arrange or ensure that the real estate assets of the REIT, or through an Special Purpose Vehicle, have "adequate insurance coverage".
The sponsors would also need to ensure that they hold at least 25% of total units for at least three years after the listing, while they would have to maintain at least 15 per cent holding at all times.
The 10-point Code of Conduct for REITs, as prescribed by Sebi, include conduct of all affairs in the interest of unit-holders, "adequate, accurate, explicit and timely disclosure of relevant material information", avoidance of any conflict of interest as far as possible or ensure appropriate disclosure and fairness in charging any fees.
Other points include carrying out of business and investments as per the stated and disclosed objectives, high standards of integrity and fairness in all dealings and exercise of due diligence, proper care and independent independent professional judgements at all times.
REITs would be liable to unit-holders for their acts of commission or omissions, notwithstanding anything contained in a contract or agreement. They would need to undertake that they do not use any unethical means to sell, market or induce any person to buy their units and the manager would be responsible for including such prohibited acts.
There have been many instances of real estate players taking investors for a ride with unfair conditions, and many of them have faced penal actions from various regulators and agencies for such practices. However, a strict regulatory regime is expected to ensure that investors' interest are protected under the REIT regime.
Like any other listed entity, REITs would need to hold an annual meeting of unit-holders at least once a year and the gap between two such AGMs can't be more than 15 months.
Also, they would need to provide their unit-holders with an Annual Report within three months from the end of the financial year, as also a half-yearly report within 45 days from the end of the half-year ending September.
The other documents required to be submitted include Offer Document (at the time of initial or further public offer), while immediate disclosure would be required of any price- sensitive information or other details having a bearing on the operation or performance of the REIT.
These would include sale or purchase of properties valued at 5% or more of the total value of REIT assets, additional borrowings, issuance of units, legal proceedings and non-compliance with applicable regulations.
For change in sponsor, or change in control of sponsor, a prior approval would be required from unit holders, wherein the votes cast in favour of the resolution would need to be at least three times of the votes against such a proposal.
If such a resolution fails to pass through, the new sponsor would need to give the dissenting unit-holders an option to exit by buying their units. If the total number of units with public investors falls below 200-mark or 25% holding, the REIT would have to seek delisting.
Like IPO or FPOs of equity shares, REITs would need to file a draft offer document with Sebi. The initial or follow- on offer would need to be undertaken by the REIT within six months from the date of issuance of observations by Sebi, failing which a fresh offer document would need to be filed.
The offer can remain open for maximum 30 days, while the listing would be mandatory within 12 working days from the closure of the offer. The offer would need to be subscribed by at least 75% of the total targeted issue size.
Before listing, REITs would need to get registered with Sebi after paying Rs. 1 lakh as application fees and further Rs. 10 lakh as registration fees at the time of grant of certificate. They would also have to pay filing fees of 0.1% of total issue size in case of initial and follow-on offers, and 0.05% in case of rights issue.