On Wednesday, Sebi released a consultation paper that includes recommendations for altering the terms and conditions of subordinate units by Real Estate Investment Trusts (REITs) or Infrastructure Investment Trusts (InvITs) after they have been issued. The consultation paper contains further proposals for the proposed framework for issuing subordinate units by REITs and InvITs.

In December of last year, Sebi requested public comments on the framework for issuing subordinate units by REITs and InvITs to sponsors, their associates, and sponsor group. The primary purpose of issuing subordinate units is to address any valuation gaps that may occur due to differences in the perceived valuation of an asset by the sponsor (asset transferor) and the REITs/InvITs (and/or its investors/unitholders).

The Securities and Exchange Board of India (Sebi) has invited public comments on the additional proposals until January 31st.

The consultation paper issued in December proposed that subordinate units can only be issued to the sponsor, its associates, and sponsor group. These units should have inferior voting rights compared to ordinary units and can be issued to eligible entities in the initial offer or in any offering subsequent to the initial offer.

Sebi has now proposed to specify a limit on the number of subordinate units that can be issued.

At any given time, the total number of outstanding subordinate units should not exceed 10 percent of the total number of outstanding ordinary units. The regulator has also suggested providing clarity on the specific inferior rights that subordinate units may have. As a result, it has proposed that subordinate units should be limited to having either inferior voting rights, inferior distribution rights, or a combination of both. Sebi outlined three options for the rights associated with subordinate units, suggesting that subordinate units can have neither distribution nor voting rights.

Sebi outlined three options for the rights associated with subordinate units, suggesting that subordinate units can have neither distribution nor voting rights.

Furthermore, there is an option for a combination of both, specifying a range (floor and cap) for the extent of inferior distribution and voting rights allowed for subordinate units compared to ordinary units. To ensure consistency in the rights conferred by subordinate units, Sebi has proposed that all subordinate units issued by a REIT/InvIT should have similar inferior rights, and there should not be multiple classes of subordinate units.

The terms and conditions related to the issuance of subordinate units are mutually agreed upon between the asset seller (the sponsor) or its associates/group entities and the asset buyer (the REIT/InvIT) at the time of acquisition of the asset. These terms and conditions include the performance benchmarks for reclassification. Since the terms and conditions are agreed upon by both parties at the time of asset acquisition, Sebi stated that allowing changes to these terms in the future would be unwise. This is because it could disrupt the certainty of the sale transaction by introducing retrospective effects, thereby impacting the agreed-upon conditions between the involved parties.

By LNN (Liyaans News Network)