Views of Pramod Rao: “The InvIT/REIT market requires greater adoption”

Pramod Rao, Executive Director, SEBI

At present, 20 infrastructure investment trusts (InvITs) and five real estate investment trusts (REITs) have been registered with the Securities and Exchange Board of India (SEBI), with the combined net assets value exceeding Rs 2.5 trillion. Despite the several benefits being offered by these investment vehicles, the market has seen limited progress. Given the huge untapped potential, SEBI aims to enhance overall infrastructure financing via these business trusts. At a recent Indian Infrastructure conference, Pramod Rao, Executive Director, SEBI, spoke about the performance of InvITs and REITs, key industry challenges and the future outlook. Excerpts…

Growth measures

Various developments have taken place re­ce­ntly with the potential to shape the InvIT/REIT industry. For instance, the concept of sponsors possessing a minimum number of units has been reconsidered. Previously, there was a guideline that permitted sponsors to hold a minimum 15 per cent stake for three years. In consultation with the industry, a new norm has been developed that extends the sponsor’s holding period. The purpose is to align the interests of the sponsors with those of the unit holders.

InvITs and REITs have diverse features that could be made popular for retail investors. For instance, SEBI has reduced the minimum application value of REITs and InvITs and has revised the trading lot to one unit. The minimum application value has also been cut down to the range of Rs 10,000-Rs 15,000 for both kinds of trust. Moreover, the parameters that apply to listed corporations have been extended to listed InvITs and REITs, wherever possible.

“SEBI is dedicated to fostering the development of InvITs and REITs.”

The timeline for listing has also been revi­sed to six working days. The long-standing re­qu­est for the issuance of commercial papers has been approved. Platforms such as the Uni­fi­ed Payments Interface have also been integrated. Additionally, norms have been relaxed for both preferential issues and institutional placements. The Covid-19 pandemic had nece­ssitated the implementation of several relief me­­asures, including the utilisation of audio and video platforms, to facilitate the engagement of unit holders. This provision has now been made permanent, with the rationale that if a certain mechanism is favourable for inves­tors during challenging times, it is likely to be beneficial at all times.

Apart from this, SEBI has constituted a co­nsultative group known as the Hybrid Securi­ties Advisory Committee (HySAC). The group serves as a conduit for the industry’s perspectives, faci­litating ideas while also serving as a feedback mechanism for the market regulator. Over the past few years, this group has convened several times to deliberate on numerous refo­r­ms and initiatives prior to their implementation.

The introduction of self-sponsored investment managers (IMs) is another noteworthy step. This has already been implemented in the mutual fund market, where the sponsor’s function has been assumed by the IM, with the sponsor relinquishing control and shareholding in the IM or related parties. With this, REITs and InvITs become completely independent of their initial sponsor, but the minimum holding requirement and other responsibilities remain with the self-sponsored IM. Another emerging regulation concerns SEBI’s SCORES portal, wherein the initial assessment of investor complaints, subsequent to the regulatory entity’s handling of the matter, will now be conducted by a designated body.

“The willingness of foreign investors to invest in a recently established asset class in India is remarkable.”

Market needs

Over time, the InvIT industry has attracted a sig­ni­ficant number of investors, particularly ov­erseas pension funds and deep-pocketed institutional investors. The willingness of foreign investors to invest in a recently established as­s­et class in India is remarkable. In order to facilitate the involvement of domestic investors in InvITs, it is imperative to impart more knowledge regarding the trusts. Currently, only a limited number of domestic investors participate in InvITs. However, their stakes are far too small compared to the corpuses they manage. Domestic participation is crucial for the industry, as there exists major potential for further development.

Likewise, it is imperative for insurance co­m­panies to assume a more prominent role. One strategy for boosting liquidity is to deepen the pool of potential investors. However, upon examining the corporate bond market, it becomes evident that there is a lack of liquidity despite the abundance of investors, particularly institutional investors, operating in this do­ma­in. The provision of liquidity is especially ne­ce­ssary to acco­m­modate the needs of retail in­ves­tors. If a class of intermediaries can em­erge, offering market making, and can make buying and selling quo­tes available for investors, it may be possible to establish certain criteria, such as minimum unit holding, for retail participation. This has the potential to generate liquidity for investors.

Municipalities hold large and long-term urban infrastructure. If the opportunity em­er­ges for those assets to be housed in InvITs, up­gra­ded urban infrastructure could also be made avai­lable via this structure. There is a need for the emergence of an industry catalyst, such as the National Bank for Financing Infra­structure and Development, or for the private sector to assu­me a leadership role, in order for this to pan out.

Future outlook

Real estate and infrastructure assets have the potential to generate favourable returns and bring diversification benefits for investors. While the road, power transmission, telecom, renewable energy, and oil and gas sectors have come out with InvITs so far, this financing vehicle is also suitable for several other sectors.

SEBI is adopting a prescriptive approach to establish a standard method for the computation of the net distributable cash flow. This is currently being discussed within HySAC. Go­ing forward, this will cater to the interests of in­ves­tors. SEBI has also undertaken a comprehe­n­sive study of REITs for micro, small and medium enterprises. This may give a boost to the real estate sector for both developers and investors, by providing a regulated financial product to harness smaller-value real estate assets.

The introduction of the InvIT/REIT index was intended to signal the potential for mutual funds to explore the possibility of developing investment schemes that can allocate assets towards InvITs and REITs. In the future, mutual funds can serve as a crucial instrument for promoting the widespread adoption of these tru­sts. At a higher level, the government has established a committee that is conducting a thorough evaluation of the criteria used to define infrastructure. SEBI anticipates that this will result in the development of an updated, har­mo­nised list of infrastructure sectors. Additi­onally, the new definition may have the potential to boost the flow of funds to the industry.

The InvIT/REIT market requires greater ad­op­tion. Currently, even though the definition of REIT has reached a specific threshold, there ex­ist clusters of smaller assets that will attract significant attention from investors. Both ins­tru­­ments engender a symbiotic relationship bet­­­­­ween developers, investors and other sta­ke­holders, facilitating the monetisation of as­sets while also enabling their active involvement in other tangible assets. SEBI is dedicated to fostering their development.

“While the road, power transmission, telecom, renewable energy, and oil and gas sectors have come out with InvITs so far, this financing vehicle is also suitable for several other sectors.”