The Securities and Exchange Board of India (SEBI), has opened the floor for public feedback regarding the issuance of subordinate units by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This move follows SEBI’s earlier consultation paper issued in December of the previous year, which sought comments on a framework for these entities to issue subordinate units to their sponsors and associated groups.
Understanding Subordinate Units:
Subordinate units are a type of investment offering within REITs and InvITs. Their purpose is to address discrepancies in asset valuation between the trust’s sponsor and its investors or unit holders. These units, which can only be issued to the sponsor, its associates, and the sponsor group, come with fewer voting rights compared to ordinary units. This difference is intended to balance the interests between different stakeholders.
SEBI’s New Proposals:
Limit on Subordinate Units (10% Ceiling): SEBI suggests capping the total number of subordinate units at 10% of the asset’s acquisition price. This limit aims to ensure that the valuation gap these units are designed to bridge remains reasonable and not excessively wide.
Voting and Distribution Rights: The proposal emphasizes that subordinate units will have lower voting or distribution rights, or possibly both, compared to other units. This clarification is intended to set clear expectations about the nature of these units.
No Changes to Terms Post-Issuance: SEBI states that once the terms and conditions for subordinate units are set, particularly concerning performance benchmarks, they should not be altered. This rule aims to maintain transparency and consistency in how these units operate after they are issued.
Public Participation Encouraged:
SEBI has invited comments and suggestions from the public on these proposals. This participatory approach ensures that various viewpoints are considered before finalizing the regulations. Interested parties are encouraged to submit their feedback by January 31, 2024, through the link provided on SEBI’s official website.