Market regulator Securities and Exchange Board of India (SEBI) has allowed Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to issue depository receipts (DRs) backed by their units and list them on GIFT City exchanges, opening another route to attract foreign investment. DRs are foreign currency-denominated instruments issued by a foreign depository against underlying units deposited with a domestic custodian.
Under two circulars issued on Monday, SEBI has specified the framework for such issuances. The permitted exchanges are India International Exchange (India INX) and NSE International Exchange, both located in the International Financial Services Centre (IFSC) at GIFT City.
75 percent unitholder approval mandatory
SEBI has specified that any fresh issue of DRs will require prior approval from unitholders, with at least 75 percent of the total votes cast in favour of the resolution.
However, this approval will not be required when a REIT or InvIT undertakes an initial offer of units and simultaneously issues DRs for listing on an international exchange. All subsequent DR offerings within the overall limit already approved by unitholders will not require fresh approval.If existing unitholders transfer their units for the purpose of issuing and listing DRs, the REIT or InvIT must provide an opportunity to all existing unitholders to tender and participate in the offering.
The framework specifically provides that a DR holder, including its beneficial owners, cannot be a person resident in India. The responsibility for ensuring compliance with this requirement rests with the DR holder and its beneficial owners.
SEBI has also prescribed eligibility conditions for REITs and InvITs seeking to issue DRs. The investment trusts, directors, promoters and partners, as well as unitholders transferring units, should not be debarred from accessing the capital market by SEBI, wilful defaulters or fugitive economic offenders.
Further, none of the parties to the REIT or InvIT, or their directors, promoters and partners, should be a promoter or director of another company or investment trust that has been debarred from accessing the capital market.
These restrictions will not apply to persons or entities whose earlier debarment by SEBI has expired by the date of filing the relevant offer document.
Merchant banker to oversee compliance
The manager of a REIT and investment manager of an InvIT will be required to appoint a merchant banker to oversee compliance relating to the issuance of DRs. The merchant banker will also have to submit a compliance report, which will be placed before the board of directors of the manager or investment manager.
For a fresh issue, the initial offer document must be filed with SEBI and the stock exchanges through the merchant banker.
SEBI will try to provide its comments within 7 working days of receiving the document. The stock exchanges will consider the regulator’s comments and decide on in-principle approval within 15 working days of receiving the application and required documents.
The framework also requires REITs and InvITs to maintain minimum public unitholding requirements at the time of DR issuance. Units deposited with the depository for issuing DRs will be treated as non-public unitholding for calculating this requirement.
Pricing and disclosures
SEBI has prescribed pricing safeguards to ensure that units underlying DRs are not issued or transferred at a price lower than the corresponding domestic transaction.
In cases involving simultaneous listings, the price of units issued or transferred for DRs cannot be lower than the price applicable to domestic investors in the corresponding initial offer, preferential allotment or institutional placement.
For other issuances or transfers, the price cannot be lower than that applicable to the corresponding mode of issuance of units to domestic investors.
SEBI circular says any public disclosures made by REITs and InvITs on international exchanges must also be filed with recognised Indian stock exchanges within 24 hours.
The framework requires domestic custodians to maintain records of DR issuance and cancellation transactions and report them to Indian depositories.
SEBI has also specified that voting rights attached to units underlying DRs, wherever applicable, can be exercised by DR holders through the foreign depository only on the basis of voting instructions received from them.
