Sebi Proposes Targeted Regulatory Changes for REITs and InvITs to Enhance Operational Flexibility
India's market regulator, the Securities and Exchange Board of India (Sebi), has unveiled a comprehensive consultation paper proposing targeted regulatory modifications for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). The proposed changes aim to streamline cash deployment, enhance borrowing flexibility, and improve post-concession asset management while steadfastly preserving existing investor protection frameworks.
Addressing Post-Concession Asset Holding Ambiguities
In a significant move, Sebi has proposed allowing InvITs to continue holding special purpose vehicles (SPVs) beyond the conclusion of a project's concession period. Under the prevailing regulatory framework, an SPV is mandated to maintain at least 90% of its assets in operational infrastructure projects. Typically, upon concession expiry, the asset reverts to governmental control, leaving the SPV devoid of a qualifying infrastructure project.
However, InvITs frequently encounter practical challenges in immediately winding up or exiting such SPVs, as they remain entangled in ongoing tax assessments, legal proceedings, defect liability obligations, and various contractual responsibilities. Sebi's proposal seeks to clarify that InvITs may retain ownership of these SPVs even during periods when they temporarily fail to meet the strict definitional criteria, thereby resolving a long-standing regulatory uncertainty that has hampered efficient asset management.
Expanding Investment Universe for Enhanced Liquidity Management
The regulator has also put forth recommendations to broaden the scope of permissible investments for both REITs and InvITs in liquid mutual fund schemes. Currently, these trusts are restricted to a narrow spectrum of liquid instruments for parking surplus funds.
By widening the eligible investment universe, Sebi intends to grant trusts substantially greater flexibility in managing their excess cash reserves without introducing material risk escalation. This strategic enhancement is expected to facilitate superior treasury management practices and potentially augment returns on idle capital, thereby optimizing overall fund performance for investors.
Aligning Investment Conditions for Greenfield Projects
Another pivotal proposal focuses on harmonizing investment conditions for private InvITs with those applicable to their publicly listed counterparts concerning greenfield projects. Presently, private InvITs operate under more stringent restrictions, which considerably limit their capacity to invest in developmental-stage infrastructure projects.
Sebi has suggested easing these constraints by permitting infrastructure trusts to allocate up to 10% of their InvIT asset value towards pure greenfield projects. This alignment with publicly listed InvIT standards is anticipated to democratize investment opportunities and stimulate greater capital flow into nascent infrastructure developments across the nation.
Liberalizing Borrowing Constraints for Operational Efficiency
The consultation paper additionally addresses borrowing limitations for InvITs whose net borrowings exceed 49% of their total asset value. Existing regulations impose rigorous restrictions on the utilization of additional borrowings once this threshold is surpassed.
Sebi has proposed expanding the permissible end-uses for fresh borrowings in such scenarios, allowing InvITs enhanced flexibility to:
- Refinance existing debt obligations at more favorable terms
- Meet operational and maintenance requirements efficiently
- Manage cash flows with greater strategic precision
These modifications would be implemented subject to appropriate safeguard mechanisms to ensure continued financial stability and investor protection. The proposed regulatory refinements collectively represent a forward-looking approach to strengthening India's REIT and InvIT ecosystem, potentially unlocking new growth avenues while maintaining robust governance standards.
