Summary of this article
Sebi proposes norms for REITs, InvITs for their ease of doing business
Changes proposed include allowing InvITs to retain investments in SPVs after the end of concession period
The Securities and Exchange Board of India (Sebi) has proposed several amendments to real estate investment trust (Reit) and infrastructure investment trust (InvIT) regulations aimed at improving the ease of doing business while also addressing challenges faced by the upcoming sector. The key changes include allowing InvITs to retain investments in special purpose vehicles (SPVs) after the end of concession period, and also expanding eligible liquid mutual fund investments for Reits and InvITs, among others.
Sebi has also proposed to allow private InvITs to invest in greenfield projects similar to public InvITs. Additionally, the paper has also proposed to broaden the scope of fresh borrowing in cases where net borrowings of InvITs exceed 49 per cent of their asset value.
The changes proposed to allow InvITs to continue holding SPVs even when the concession period is terminated is aimed at increasing flexibility and asset handling while retaining existing protection norms for investors. Under current norms, SPVs must maintain at least 90 per cent of their assets in infrastructure projects. Once the concession period ends, the assets usually go back to the government, which leaves the SPV without an eligible infrastructure project, thus making it difficult for them to maintain the 90 per cent investment norm. According to the proposal, InvITs can now exit such SPV or acquire a new project within a year of settlement of obligations while also providing enhanced disclosures of liabilities and ongoing litigations.
Sebi has further proposed to expand investment scope for Reits and InvITs in liquid mutual fund schemes. Under the current norms, investments are only allowed in a narrow set of liquid instruments for the sector. Widening the eligibility to invest in liquid schemes gives greater flexibility for these trusts in parking surplus cash while maintain their risk limits. This will also help improve in managing treasury and the returns on idle funds. The markets regulator has suggested lowering the minimum credit risk value requirement from 12 to 10 to allow investments in liquid schemes classified as Class A-I or Class B-I, in order to reduce risk of concentration and allow diversification of their assets.
The proposal also includes allowing InvITs to invest up to 10 per cent of their asset value in pure greenfield projects. This flexibility is currently available only to public InvITs.
The paper also addresses borrowing constraints for InvITs where net borrowings exceed 49 per cent of asset value. Under current norms, strict limits exist on how additional borrowings can be used once the borrowing threshold is crossed. Along with asset acquisition and development, InvITs can now be allowed to raise fresh money for capital expenditure and maintenance, while also raising to refinance their existing debt. This is allowed provided that such refinancing does not exceed the overall leverage.
