PARTIES TO REAL ESTATE INVESTMENT TRUST - SPONSOR

[Mr. M. GOVINDARAJAN]

Introduction

A real estate investment trust (‘REIT’ for short) is a company that owns, operates or finances income-producing real estate. REITs provide an investment opportunity, like a mutual fund, that makes it possible for everyday Americans—not just Wall Street, banks, and hedge funds—to benefit from valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.

REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries, through the purchase of individual company stock or through a mutual fund or exchange traded fund. The stockholders of a REIT earn a share of the income produced – without actually having to go out and buy, manage or finance property.

REIT is a trust registered with SEBI to carry out the activity prescribed under SEBI (Real Estate Investment Trusts) Regulations, 2014. A REIT raises funds by issuing units to investors and invests those funds primarily in assets in real estate sector. The investment in such assets can be made directly or through SPV/Holding Company. The investors who hold units in a REIT are called unit holders. The income generated from the underlying assets of the REIT is regularly distributed to the unit holders.

Parties to REIT

The parties to REIT are as below-

• Sponsor;
• Manager;
• Trustee.

In this article the role and responsibilities of the sponsor on REIT is discussed.

Sponsor

Regulation 2(1) (zt) defines the term ‘sponsor’ as any person(s) who set(s) up the REIT and designated as such at the time of application made to the Board and shall include an inducted sponsor.

The Sponsor   is  responsible  for  setting  up  of  the  REIT and  the  formation  transaction.  The  Sponsor   plays  a  key  role  in  the  context  of  the  registration  of  the REIT as registration is inter alia granted based on the eligibility conditions  fulfilled  by  the  Sponsor.

.Inducted sponsor

Regulation 2(1)(qaa) defines the expression ‘inducted sponsor’ as any person who has been inducted as a sponsor in accordance with sub-regulation (8) of regulation 22.

Self sponsored Manager

Regulation 2(1)(zra) defines the expression ‘self sponsored Manager’ as the Manager of a REIT who has dual responsibilities of both the Manager as well as the sponsor.

Sponsor group

Regulation 2(1)(zta) defines the expression ‘sponsor group’ as including-

• the sponsor(s);
•  in case the sponsor is a body corporate-

1. entities or person(s) which are controlled by such body corporate;
2. entities or person(s) who control such body corporate;
3. entities or person(s) which are controlled by person(s) as referred at clause b.

•  in case sponsor is an individual-

1. an immediate relative of such individual (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and
2. entities or person(s) which are controlled by such individual.

Registration of REIT

An application for registration of REIT shall be made by the sponsor on behalf of the trust in Form A to the SEBI.

• each sponsor shall hold or propose to hold not less than 5% of the number of units of the REIT on post-initial offer basis;
• each sponsor and sponsor group shall be clearly identified in the application of registration to the Board and in the offer document/placement memorandum, as applicable;
• for each sponsor group not less than one person shall be identified as a sponsor.

The entities categorized as sponsor group, only the following entities may be considered-

• a person or entity who is directly or indirectly holding an interest or shareholding in any of the assets or SPVs or holdcos proposed to be transferred to the REIT.
• a person or entity who is directly or indirectly holding units of the REIT on post-issue basis.
• a person or entity whose experience is being utilized by the sponsor for meeting with the eligibility conditions required under regulation 4(d)(iii) of these regulations.

Net worth     

The sponsor(s), on a collective basis, have a net worth of not less than Rs.100 crore.  Each sponsor has a net worth of not less than Rs.20 crore. 

Experience

The sponsor or its associate(s) has not less than 5 years experience in development of real estate or fund management in the real estate industry.  Where the sponsor is a developer, at least 2 projects of the sponsor have been completed.

Rights and responsibilities

• The sponsor(s) and sponsor group(s) shall set up the REIT and appoint the trustee of the REIT.
• The sponsor(s) and sponsor group(s) shall transfer or undertake to transfer, subject to a binding agreement and adequate disclosures in the initial offer document, their entire shareholding or interest and rights in the holdco and/or SPV or entire ownership of the real estate assets to the REIT prior to allotment of units of the REIT to the applicants.
• The above shall not apply to the extent of any mandatory holding of shares or interest and rights in the holdco and/or SPV by the sponsor(s) and sponsor group(s) as required under any Act or regulations or circulars or guidelines of government or regulatory authority as specified from time to time.
• The sponsor(s) and sponsor group(s) shall collectively hold not less than -

• 15% of the total units of the REIT, for 3 years from the date of listing of units in the initial offer.  any holding by the sponsor(s) and sponsor group(s) exceeding 15% shall be held for a period of not less than 1 year from the date of listing of units issued in the initial offer;
• 5% of the total units of the REIT, from the beginning of 4^th  year and till the end of 5^th  year from the date of listing of the units issued in the initial offer;
• 3% of the total units of the REIT, from the beginning of 6^th  year and till the end of 10^th  year from the date of listing of the units issued in the initial offer;
• 2% of the total units of the REIT, from the beginning of 11^th  year and till the end of 20^th  year from the date of listing of the units issued in the initial offer;
• 1% of the total units of the REIT, after completion of the 20^th   year from the date of listing of units issued in the initial offer. the maximum value of the units to be held by the sponsor(s) and sponsor group(s) for compliance with these regulations shall not exceed Rs.5 crore or such other value as may be decided by the Board from time to time and such valuation shall be based on the latest available net asset value of the REIT;
• an assessment of compliance of requirements under Regulation 3 shall be done at the time of each fresh issuance of units and at the beginning of change in threshold of the percentage for minimum unit holding requirement as specified in this sub-regulation;
• for REITs that have already issued units pursuant to an initial offer as on the date of coming into effect of the SEBI (Real Estate Investment Trusts) (Second Amendment) Regulations, 2023, the provisions contained in Regulation 3 shall be applicable only for the additional units issued by the REIT after such date and the units that are locked in at the time of initial offer shall continue to be locked in till the completion of 3 years from the date of listing of units in such initial offer.

• The units required to be held shall be locked in and shall not be encumbered. Any encumbrance created on units held to comply with the minimum unit holding requirement applicable before the date of coming into effect of the SEBI (Real Estate Investment Trusts) (Second Amendment) Regulations, 2023, may continue if the encumbrance exist on such date
• The sponsor(s) and the sponsor group(s) shall continue to be liable to the REIT, trustees and unit holders for all acts of commission or omission, representation or covenants related to the formation of the REIT and the sale or transfer of assets or holdco or SPV to the REIT.

Conclusion

The role played by sponsors is the backbone of the trusts.  In contrast to their Western counterparts, Indian REITs offer a unique combination of growth potential and a consistent dividend component. The metric rise of REITs on the global stage, coupled with India’s growing REIT market, signals a promising future for the country’s commercial real estate sector.