SEBI Issues Framework for Fast-Track Follow-On Offers by REITs and InvITs

The Securities and Exchange Board of India (SEBI) has introduced a framework to facilitate fast-track follow-on offers (FPOs) by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This initiative aims to simplify fundraising processes, ensuring that REITs and InvITs can efficiently access capital markets for expansion and project development. By establishing clear guidelines, SEBI seeks to enhance investor confidence and market transparency.

SEBI has also introduced a lock-in requirement for the preferential issue of units to sponsors of REITs and InvITs. As per the new regulations, 15% of the units allotted to sponsors and sponsor groups must be locked in for three years from the date of trading approval. The remaining units will be locked in for one year from the date of trading approval. These provisions are designed to maintain stability in unit holdings and prevent sudden exits that could disrupt market dynamics. Ensuring that sponsors have a long-term commitment to their projects is expected to increase investor trust in REITs and InvITs.

A follow-on public offer (FPO) allows REITs and InvITs to raise additional capital beyond their initial public offering (IPO). SEBI’s framework outlines the essential steps and conditions that entities must fulfill to conduct an FPO. Entities planning an FPO must seek in-principle approval from all stock exchanges where their units are listed. They must also designate a primary stock exchange for the process. Additionally, all units issued through the FPO must be in dematerialised form, ensuring transparency and ease of trading. Managers and merchant bankers involved in the FPO are responsible for securing both in-principle and final listing approvals from stock exchanges.

Another key requirement is maintaining a minimum public unit holding. After an FPO, at least 25% of the total outstanding units must be held by the public. This requirement ensures adequate market participation and liquidity, which is crucial for maintaining investor interest and regulatory compliance. The provisions also mandate that the follow-on offer document be filed with SEBI and recognized stock exchanges after incorporating any regulatory observations. Merchant bankers must submit a due-diligence certificate alongside the draft follow-on offer document to SEBI, affirming compliance with the required norms.

SEBI has also provided additional clarification on the inter se transfer of units among sponsors and sponsor group entities within REITs and InvITs. These guidelines help maintain transparency in ownership structures and ensure that all transactions align with regulatory requirements. By specifying how units can be transferred within the sponsor group, SEBI aims to prevent any misuse of shareholding structures that could mislead investors or manipulate market conditions.

The introduction of a structured process for FPOs is expected to improve capital accessibility for REITs and InvITs. By establishing clear regulations for stock exchange approvals, listing procedures, and public unit holdings, SEBI is creating a standardized approach to fundraising. The lock-in provisions for preferential allotments to sponsors will ensure that key stakeholders remain committed to the long-term success of their projects. This stability is essential for attracting both retail and institutional investors, who often seek assurance that sponsors have a vested interest in the trust’s performance.

The framework also enhances the role of managers and merchant bankers in maintaining regulatory compliance. They are now required to oversee the entire FPO process, ensuring that investors receive accurate information and that all filings adhere to SEBI’s guidelines. This increased accountability is expected to reduce risks associated with non-compliance and promote fair market practices.

As the real estate and infrastructure sectors continue to expand, these regulatory measures will play a critical role in shaping their growth. The new framework provides a structured and predictable environment for fundraising, which is crucial for long-term infrastructure development. By streamlining the FPO process and improving compliance measures, SEBI is supporting the sustainable expansion of REITs and InvITs in India.

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