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SEBI has proposed allowing REITs, SM REITs, and InvITs to use the interest rate derivatives for risk hedging, like interest rate swaps, to stabilise the cash flows and to protect the unitholders. It suggests allowing locked-in units to transfer among sponsors, enhancing sponsor flexibility without reducing commitment. Fixed deposits could count as cash equivalents for leverage calculation, and SEBI aims to clarify credit rating requirements and board vacancy timelines. REITs may invest in liquid mutual funds, and facilities like power plants and water treatment would qualify as "common infrastructure." SEBI's proposals focus on business flexibility, regulatory clarity, and investor protection.
SEBI, India's market regulator, has proposed several new regulations to enhance the operational flexibility, risk management, and overall ease of business for Real Estate Investment Trusts (REITs), Small and Medium REITs (SM REITs), and Infrastructure Investment Trusts (InvITs). In a recently released consultation paper, SEBI suggests allowing these entities to utilise interest rate derivatives, such as interest rate swaps, specifically for the purpose of hedging against interest rate fluctuations. This move is aimed at stabilising cash flows, reducing associated financial risks, and safeguarding the interests of unitholders, particularly in the case of long-term infrastructure projects that often face high exposure to interest rate volatility. Advertisement
A significant part of SEBI's proposal focuses on enabling more flexibility for sponsors of REITs and InvITs. The regulator has recommended that locked-in units-shares that are restricted from being traded for a certain period-be allowed to transfer between sponsors and their affiliated groups. This measure aligns with existing rules for promoters in listed companies, designed to support sponsors in adjusting their holdings without diminishing their commitment, or 'skin in the game,' to the investment structure. The intention is to allow sponsors more freedom in managing their assets while ensuring that their vested interest remains strong.
Furthermore, SEBI has recommended several changes to streamline financial and operational guidelines. One proposal is to permit fixed deposits to be classified as cash equivalents when calculating leverage, which could provide REITs and InvITs greater flexibility in managing their debt levels. SEBI also intends to clarify credit rating requirements for REIT and InvIT borrowings, ensuring transparency and consistency in evaluating the financial stability of these entities. To improve governance, a timeline for filling board vacancies in REITs and InvITs is also proposed, aiming to maintain effective leadership and oversight.
To enhance liquidity, SEBI has proposed allowing REITs to invest in liquid mutual funds, potentially providing these entities with an additional low-risk avenue for cash management. Additionally, SEBI has outlined guidelines to protect investors and ensure ease of doing business for REITs and InvITs, aiming to foster a more conducive investment environment.
The regulator has also introduced the concept of 'Common Infrastructure' for REIT regulations. SEBI proposes that shared facilities like power plants, heating and cooling systems, water treatment, and waste management plants that service multiple REIT assets will be recognised as common infrastructure under the new rules, even if these facilities are spread across different projects for technical reasons. However, to qualify, such infrastructure must exclusively benefit REIT assets. Notably, power plants within this category would be permitted to sell any excess electricity to state utilities or the grid, with any resulting credits or payments directed to the REIT's benefit.
These proposed changes reflect SEBI's commitment to enhancing the regulatory framework for REITs and InvITs, focusing on promoting business flexibility, ensuring regulatory clarity, and bolstering investor protection.
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