SEBI allows REITs, InvITs to Issue Depositary Receipts

Market regulator SEBI on Monday allowed issuance of Depositary Receipts (DRs) against units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), in a move aimed attracting more foreign capital into these investment vehicles.

Depositary Receipts are foreign currency-denominated instruments issued by a foreign depositary in a permissible jurisdiction against securities deposited with a domestic custodian in India.

Under the framework, REITs, and InvITs can issue fresh units or facilitate the transfer of existing units held by unitholders for issuing DRs, according to two separate circulars issued by the Securities and Exchange Board of India (SEBI).

The foreign currency denominated instruments will be listed on specified international exchanges in India’s International Financial Services Centre (IFSC) – India International Exchange (India INX) and NSE International Exchange.

The framework was proposed in August to attract foreign capital to these financial instruments. Later, this was approved by the board of SEBI in September. Also, SEBI issued eligibility criteria, issuance procedures, pricing norms, and compliance requirements for such offerings.

In its circulars, Sebi said REITs, and InvITs and their respective parties, directors, promoters, partners, and unitholders transferring units must meet specified eligibility conditions.

These includes not being debarred from accessing the capital market, being wilful defaulters or fugitive economic offenders. Further, a person or entity that is a promoter or director of another company, REIT or InvITs debarred by Sebi will also be ineligible.

However, these restrictions will not apply to persons or entities whose earlier period of debarment has expired by the date of filing the relevant offer document.

Sebi has also specified that DR holders, including their beneficial owners, cannot be residents of India. The responsibility for ensuring compliance with this condition will rest with the DR holders and their beneficial owners.

The manager of a REIT and the investment manager of an InvIT will be required to file the initial offer document through a merchant banker with Sebi and recognised stock exchanges.    

Thereafter, Sebi will forward its comments, if any, within seven working days of receiving the document, while stock exchanges will decide on in –principle approval within 15 working days of receiving the application and requisite documents.

Any fresh issue of DRs will require prior approval of unitholders, with at least 75 per cent of the votes in favour of the resolution.

The approval requirement will not apply to REITs and InvITs undertaking an initial domestic offer and listing alongside a simultaneous DR issue or an international exchange. A fresh approval will also not be required for subsequent DR offerings within the overall limit already approved by unitholders.

In case where existing unitholders transfer their units for the purpose of a DR listing, the respective REIT or InvIT will have to provide all existing unitholders an opportunity to tender their units.

The manager and investment manager will also have to ensure compliance with minimum public unitholding requirements at the time of issuance. Units deposited with a domestic custodian for issuing DRs will be treated as non-public unitholding for this calculation.

Additionally, the manager or investment manager must appoint a merchant banker to oversee regulatory compliance relating to the DR issuance. The merchant banker will submit a compliance report, which will be placed before the board of directors of the respective manager or investment manager.

On pricing, Sebi has specified that in cases of simultaneous listing of units in India and DRs on an international exchange, the price of units issued or transferred for the DRs cannot be lowered than the price applicable to the corresponding domestic offering, preferential allotment or institutional placement.

The same principle will apply when units are issued or transferred separately for the purpose of issuing DRs.

The framework also requires REIT managers and InvIT investment managers to ensure that disclosures made by the trusts on international exchanges are filed with recognised stock exchanges in India within 24 hours.

Voting rights attached to the underlying units, if any, will be exercised by DR holders though the foreign depositary and only on the basis of voting instructions received from DR holders, Sebi said.  

To strengthen the monitoring mechanism, domestic custodians will maintain records of DR issuance and cancellation transactions and report them to Indian depositories.

The foreign depositary will not be permitted to issue DRs until the domestic custodian confirms receipt of the underlying units.

The framework comes into effect immediately, the regulator said.