In this update we highlight the key features of the governance norms applicable to REITs and InvITs, as notified by SEBI on February 14, 2023. These are important changes, which are expected to significantly contribute towards establishing robust governance frameworks for REITs and InvITs at par with listed companies.
Background
On February 14, 2023, the Securities and Exchange Board of India ("SEBI") has notified amendments (the "2023 Amendments") to the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (the "REIT Regulations") and the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 (the "InvIT Regulations"), which codify the governance norms applicable to real estate investment trusts ("REITs") and Infrastructure Investment Trusts ("InvITs") (REITs and InvITs together as "Investment Trusts")
Prior to the 2023 Amendments, the REIT Regulations and the InvIT Regulations prescribed certain limited governance requirements, including 50% of the board of directors of the investment manager of an InvIT/manager of a REIT ("Board") being independent and appointment of a compliance officer, however the applicability of governance norms provided under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations") on Investment Trusts was not clear. Due to lack of clarity, some of the Investment Trusts were voluntarily complying with the governance norms provided under the LODR Regulations as a good governance measure, however, the practice was not uniform. Further, on January 17, 2023, the LODR Regulations were amended to clarify that the governance norms provided under the LODR Regulations will not be applicable to Investment Trusts. The 2023 Amendments now provide clarity on the applicability of governance norms under the LODR Regulations to Investment Trusts.
Key Changes and Implications
The changes provided under the 2023 Amendments are applicable with effect from the date of publication (i.e. February 14, 2023), whereas certain amendments are applicable with effect from April 1, 2023.
Key Changes with effect from April 1, 2023
Independent Directors
Investment Trusts have an obligation to ensure that 50% of the Board is constituted of independent directors. However, prior to the 2023 Regulations, the REIT Regulations and InvIT Regulations did not provide a definition or any criteria for a director to qualify as an 'independent director'.
While, listed Investment Trusts were voluntarily adopting the tests for independence under the LODR Regulations as a guiding criteria - the 2023 Amendments have included a definition of 'independent director' and aligned the tests of independence for Investment Trusts with the LODR Regulations.
The following are some key considerations:
- Independent directors will be required to satisfy independence tests such as demonstrating no conflict of interest or pecuniary relationships and requisite expertise to act as an independent director.
- The independence tests will need to be tested at various levels, including the Investment Trust, the Holdco/SPV and the parties to the Investment Trusts (and its holding company, subsidiary or associate or their promoters or directors). Given that the parties to the Investment Trust include sponsor(s), sponsor group (applicable only to a REIT), trustee, investment manager/manager, trustee and project manager (applicable only to an InvIT), the independence tests for Investment Trusts are more expansive than those applicable to listed companies.
- Parties to the Investment Trusts also include the 'trustee' of the Investment Trust, which is typically an institutional trustee. Since, the REIT Regulations and InvIT Regulations require a trustee to be an independent entity (not related to the sponsor(s) and the investment manager/manager), it will be critical to check the independence criteria from a trustee perspective, given that some of the independence criteria will need to be tested at the level of the holding company and associates (in case of certain tests) of the trustee.
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