Sebi Plans To Let Reits, InvITs Invest In Third-Party Under Construction Projects: Here’s What It Means For Investors

The Securities and Exchange Board of India (Sebi) has proposed a series of measures to ease regulations for real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), including allowing them to invest in third-party under-construction projects without taking a controlling stake. This will simplify unitholder approval rules, ease exit offer norms as well as reduce the cooling-off period for offer for sale (OFS) by privately listed InvITs.  The regulator has also proposed recognising remote common infrastructure as real estate for Reits.

The proposals were released through a consultation paper on August 6, 2006 as part of Sebi’s ease of doing business initiative for Reits and InvITs. The market regulator has invited public comments on the proposals until August 27.

Reits, InvITs May Be Allowed To Invest In Third-Party Projects

One of the key proposals would allow Reits and InvITs to invest in third-party under-construction projects without taking a controlling interest, as long as such investments remain within the existing limits permitted for under-construction assets. At present, Reits and InvITs can invest in under-construction projects only if they hold a controlling interest in the special purpose vehicle (SPV). 

Industry associations had asked Sebi to relax this requirement, saying minority investments would help provide development-stage capital while creating a pipeline of future income-generating assets. “It is proposed that InvIT and Reit regulations shall be amended to permit InvITs and Reits to invest in under-construction projects without controlling interest within the existing limits available for investments in under construction projects,” Sebi said.

To limit risks, Sebi has proposed several safeguards. Investments would be allowed only in entities engaged in real estate or infrastructure-related activities. Reits and InvITs would also need a clear commitment and glide path to eventually acquire the required stake and convert the investment into a HoldCo or SPV. 

They must sign a binding agreement with other shareholders to ensure decisions do not go against the agreed glide path. In addition, sponsor and sponsor group entities cannot have any shareholding or rights in the investee entity, and every investment must be approved by the board of the investment manager or manager.

Sebi Proposes Simpler Unitholder Approval Rules

Sebi has also proposed changing how approval thresholds are calculated for certain resolutions requiring unitholder approval.

At present, these resolutions require approval from 75 per cent of unitholders by value. 

According to Sebi, achieving this threshold has become difficult because many investors do not participate in voting despite the availability of remote e-voting. It has proposed replacing the existing requirement with a threshold based on votes cast, under which at least 75 per cent of the total votes cast must support the resolution. The regulator said this would also align the framework with the Companies Act, 2013.

Exit Offer Framework May Be Simplified

Sebi has also proposed changes to the exit offer framework when there is a change in sponsor. Under the proposal, only investors who vote against a resolution would qualify as dissenting unitholders. 

At present, investors who do not vote are also treated as dissenting unitholders.

The regulator has also proposed clarifying who should provide the exit offer when one sponsor exits a Reit or InvIT with multiple sponsors. It has further proposed allowing all tendered units to be accepted during an exit offer and giving trusts one year to restore minimum public unitholding if it falls below the prescribed threshold because of the exit offer.

Remote Common Infrastructure May Be Treated As Real Estate

For Reits, Sebi has proposed recognising remote common infrastructure as real estate. According to the consultation paper, the current framework creates an inconsistency because common infrastructure can be located away from a project, but such remote infrastructure is not recognised as real estate. This creates hurdles for assets, such as captive renewable energy facilities that support commercial real estate projects.

To address this, Sebi has proposed amending the definition of real estate to include remote common infrastructure. It has also proposed removing a separate provision allowing investment in common infrastructure companies, saying it would become redundant after the proposed amendment.

Sebi Proposes Shorter Cooling-Off Period For Private InvIT OFS

The regulator has also proposed reducing the cooling-off period for offer for sale (OFS) transactions involving illiquid privately-listed InvITs from 12 weeks to eight weeks.

Sebi said privately-listed InvITs face structural liquidity constraints because of their Rs 25 lakh trading lot, which limits participation largely to institutional investors, body corporates and high networth individuals (HNIs). Reducing the cooling-off period is expected to make the OFS process more efficient for such InvITs.

What It Means For Investors

If implemented, the proposals could give Reits and InvITs more flexibility to invest in future assets while simplifying voting and exit rules for investors.

However, allowing minority investments in under-construction projects could increase execution risks. Such projects may face delays, cost overruns, or regulatory hurdles. Since the Reit or InvIT would not initially have full control, its ability to influence key decisions could also be limited. 

To address these risks, Sebi has proposed safeguards such as mandatory board approvals, binding shareholder agreements, a clear path to eventually acquire control, and restrictions on the types of entities that can receive such investments.