Sebi proposes interest rate derivatives for REITs, InvITs for risk hedging
ECONOMY & POLICY

Sebi proposes interest rate derivatives for REITs, InvITs for risk hedging

Markets regulator Sebi has proposed allowing Real Estate Investment Trusts (REITs), Small and Medium REITs (SM REITs), and Infrastructure Investment Trusts (InvITs) to use interest rate derivatives, like interest rate swaps, to hedge against interest rate risks. This would help stabilize cash flows, mitigate risks, and protect unitholder interests, especially for long-term infrastructure projects.

Sebi's proposal also suggests allowing locked-in REIT and InvIT units to be transferred among sponsors and their affiliates, akin to the transfer norms for promoters of listed companies. This measure aims to provide flexibility in managing holdings without diminishing sponsors' commitment.

Other recommendations include treating fixed deposits as cash equivalents for leverage calculations, clarifying credit rating requirements for REIT and InvIT borrowing, mandating timely board appointments, and expanding REIT and SM REIT asset bases. Sebi also proposed allowing REITs to invest in liquid mutual funds.

The regulator further suggests defining "common infrastructure" for REITs to include utilities like power, heating, cooling, water treatment, and waste management systems serving one or more REIT assets, even if technically not within a single project. For power plants, excess energy could be sold to the state grid, benefiting REIT assets financially.

To improve transparency, Sebi plans to amend InvIT quarterly reporting norms, mandating that reports directly reflect InvIT performance, rather than only investment manager segments, aligning with REIT standards. Sebi also proposes aligning REIT and InvIT NRC (Nomination and Remuneration Committee) composition with listed company standards, allowing a mix of independent and non-executive directors.

For investor protection, Sebi aims to review conditions for InvITs seeking borrowing beyond 49%, scrutinize REIT investments in unlisted equities, and clarify trustee responsibilities across REITs, InvITs, and SM REITs.

In a separate paper, Sebi has proposed a framework for "restricted return InvITs," designed to offer structured returns with both downside protection and a cap on upside gains, ensuring predictable returns for infrastructure investors. These investments would be limited to high-net-worth investors, with a minimum unit price of Rs 5 billion and total assets of at least Rs 500 billion, with clear risk acknowledgment required prior to investment.

Sebi has invited public feedback on these proposals by November 13. (ET)

Markets regulator Sebi has proposed allowing Real Estate Investment Trusts (REITs), Small and Medium REITs (SM REITs), and Infrastructure Investment Trusts (InvITs) to use interest rate derivatives, like interest rate swaps, to hedge against interest rate risks. This would help stabilize cash flows, mitigate risks, and protect unitholder interests, especially for long-term infrastructure projects. Sebi's proposal also suggests allowing locked-in REIT and InvIT units to be transferred among sponsors and their affiliates, akin to the transfer norms for promoters of listed companies. This measure aims to provide flexibility in managing holdings without diminishing sponsors' commitment. Other recommendations include treating fixed deposits as cash equivalents for leverage calculations, clarifying credit rating requirements for REIT and InvIT borrowing, mandating timely board appointments, and expanding REIT and SM REIT asset bases. Sebi also proposed allowing REITs to invest in liquid mutual funds. The regulator further suggests defining common infrastructure for REITs to include utilities like power, heating, cooling, water treatment, and waste management systems serving one or more REIT assets, even if technically not within a single project. For power plants, excess energy could be sold to the state grid, benefiting REIT assets financially. To improve transparency, Sebi plans to amend InvIT quarterly reporting norms, mandating that reports directly reflect InvIT performance, rather than only investment manager segments, aligning with REIT standards. Sebi also proposes aligning REIT and InvIT NRC (Nomination and Remuneration Committee) composition with listed company standards, allowing a mix of independent and non-executive directors. For investor protection, Sebi aims to review conditions for InvITs seeking borrowing beyond 49%, scrutinize REIT investments in unlisted equities, and clarify trustee responsibilities across REITs, InvITs, and SM REITs. In a separate paper, Sebi has proposed a framework for restricted return InvITs, designed to offer structured returns with both downside protection and a cap on upside gains, ensuring predictable returns for infrastructure investors. These investments would be limited to high-net-worth investors, with a minimum unit price of Rs 5 billion and total assets of at least Rs 500 billion, with clear risk acknowledgment required prior to investment. Sebi has invited public feedback on these proposals by November 13. (ET)

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