Entities who have or intend to set up real estate or infrastructure investment trusts can borrow funds against their units.
The sponsors—entities who set up this structure—can create encumbrances on their units to raise capital, the market regulator said in a circular on Monday. Encumbrances can include pledge, lien, negative lien, non-disposal undertaking, or any other covenant, transaction, condition or any arrangement of this nature, as per the circular.
REITs and InvITs are long-term yield investments and so far, sponsors haven't been able to leverage their capital, said Siddharth Shah, senior partner at Khaitan & Co. said. This move gives them additional flexibility, he said.
SEBI's regulations for real estate investment trusts or REITs require sponsors to hold a minimum 25 percent of units for at least three years from the date of listing. Thereafter, they must hold at least 15 percent of the total units at all times. For InvITs, the lock-in period for sponsors is at least 15 percent of the units for three years.
The relaxation granted by SEBI comes with certain riders:
- Encumbrances created on InvIT units cannot be invoked.
- For REITs, encumbrances can be invoked during the holding period as long as the entity invoking it becomes the sponsor or nominates someone on its behalf. The re-designated sponsor will then have to fulfill all the obligations specified in the regulations.
Since REIT regulations require sponsor lock-in at all times, it makes sense to allow for invocation as long as that entity can become the sponsor. “You cannot have a situation where the sponsor's pledge is invoked and there's no one to take its place,” Shah explained.
But in case of InvITs, this lifetime lock-in requirement is not there and hence invocation hasn't been permitted. Since the lock-in is only for three years, a lender can get an exit after that, Shah said.
Besides easing capital raising, SEBI also notified temporary relaxation in compliance requirements for REITs and InvITs. The due date of March 31, 2020 for regulatory filings and compliances for REITs and InvITs has been extended by a month in the wake of Covid-19 pandemic.
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