SEBI Seeks Public Input on Proposed Amendments to REIT and InvIT Rules

The Securities and Exchange Board of India (SEBI), the capital markets regulator, has initiated a consultation process seeking public comments on proposed amendments to the master circulars for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The proposed changes aim to provide greater clarity on the nomination rights of directors to the boards of REIT and InvIT managers. This move is part of SEBI's broader effort to enhance transparency and governance within these investment vehicles.

Background and Rationale

On July, SEBI released a consultation paper detailing the proposed amendments. The key focus of these changes is to address the requests from market participants for clear guidelines regarding the rights of unitholders to nominate directors to the boards of REIT and InvIT managers. Under the current norms, a unitholder holding a significant portion of units in an InvIT or REIT can nominate a director if their unitholding exceeds a specified threshold.

However, the lack of clarity around these nomination rights has led to confusion and requests for more explicit regulations. The amendments propose that the restriction on nominating a unitholder nominee director will not apply if the right to appoint a nominee director is already available under the SEBI (Debenture Trustees) regulations.

Key Proposed Amendments

1. Nomination Rights for Unitholders: The amendments aim to clarify that unitholders with significant holdings in an InvIT or REIT have the right to nominate a director to the board of the investment manager or manager. This right is particularly relevant when the unitholder also holds the right to nominate a director as a lender to the investment manager, manager, or the InvIT/REIT, including its holding companies or special purpose vehicles (SPVs).

2. Exemption from Restrictions: The proposed changes include a provision that the restriction on nominating a unitholder nominee director shall not be applicable if the nomination right is available under the SEBI (Debenture Trustees) regulations. This exemption is designed to align the nomination rights across different regulatory frameworks and ensure consistency.

3. Amendment to Master Circulars: SEBI proposes to amend the Master Circulars for InvITs and REITs, both dated May 15, 2024, to incorporate these clarifications. These amendments will provide a clear regulatory framework for the nomination rights of unitholders, reducing ambiguity and enhancing the governance of REITs and InvITs.

Implications for Market Participants

The proposed amendments are expected to have several implications for market participants:

• Enhanced Governance: By clarifying the nomination rights of unitholders, SEBI aims to strengthen the governance of REITs and InvITs. Clear guidelines on director nominations can help ensure that the boards of these investment vehicles are composed of qualified and representative directors.
  
• Increased Transparency: The amendments are part of SEBI's ongoing efforts to enhance transparency in the capital markets. By providing explicit rules on nomination rights, SEBI seeks to reduce potential conflicts of interest and ensure that the governance structures of REITs and InvITs are transparent and fair.
  
• Regulatory Consistency: Aligning the nomination rights under the REIT and InvIT frameworks with those under the SEBI (Debenture Trustees) regulations will promote regulatory consistency. This alignment can help streamline compliance for market participants and reduce regulatory burdens.
  

Public Consultation Process

SEBI has invited public comments and suggestions on the draft circulars until July 29, 2024. Stakeholders, including unitholders, market participants, and industry experts, are encouraged to provide their inputs on the proposed amendments. The consultation process is an opportunity for stakeholders to engage with SEBI and contribute to the development of a robust regulatory framework for REITs and InvITs.

Conclusion

The proposed amendments to the REIT and InvIT rules represent a significant step towards enhancing the governance and transparency of these investment vehicles. By clarifying the nomination rights of unitholders, SEBI aims to address market participants' concerns and ensure that the boards of REITs and InvITs are well-governed and representative. The public consultation process provides an opportunity for stakeholders to share their views and contribute to the refinement of the regulatory framework. As SEBI continues to seek public input, the final amendments are expected to reflect a balanced approach that addresses the needs of all market participants.