Securities and Exchange Board of India (SEBI) has released draft circulars on February 14, 2025, proposing revisions to the existing chapters 3 and 4 and paragraph 7 of Annexures 5 and 6 of the master circulars for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) dated May 15, 2024. The revisions have been bifurcated by SEBI into measures related to ease of doing business and measures enhancing investor protection. For more, click here.
The following key changes have been proposed by SEBI to promote ease of doing business:
- Financial Information of REITs/InvITs
REITs/InvITs must disclose audited combined financial statements of for the last three financial years preceding the date of the offer document/ placement memorandum and any applicable stub period in cases of initial offer. Audited stub period financial statements will be disclosed only if latest financial year’s statements are older than six months from date of filing of the offer document.
In follow-on offers, audited consolidated financial statements of REITs/InvITs are to be disclosed and the link of separate financial statements of the REITs/InvITs (as uploaded on its website) must be specified in the offer document. If a REIT/InvIT has existed for a period of less than three years, then financial statements for such period and stub period will be disclosed. Additionally, if any material assets have been acquired or divested after the latest disclosed financial period but before the date of filing the offer document, certified pro forma financial statements for the last completed financial year and any stub period must be provided.
These changes have been proposed to align the period of disclosure of financial statements in offer documents with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).
- Pro Forma Financial Statements
Acquisitions and divestments will be considered material for the purposes of preparation of pro forma financial statements only if it contributes (in aggregate) 20% or more to turnover, net worth or profit before tax in the latest annual consolidated financial statements. These statements must be prepared according to Institute of Chartered Accountants of India (ICAI)’s guidance notes and certified by REIT/InvIT’s statutory auditor or a chartered accountant holding a valid certificate issued by peer review board of ICAI. Where businesses acquired or divested do not represent a separate entity, carved out financial statements for the investment trusts should be prepared per ICAI’s guidance note.
Investment trusts may also choose to voluntarily provide these statements if the acquisition or divestment is below the threshold. However, for non-material acquisitions or divestments, offer document must contain the fact of such acquisition, consideration paid or received, and mode of financing. These disclosures will also be certified by statutory auditor of REIT/InvIT or a chartered accountant.
- Projections of Revenues and Operating Cash Flows of Investment Trusts
Projections of income and operating cash flows of investment trusts including related assumptions, project wise, are to be included in the initial offer document for both, the current financial year (i.e. the year of filing the offer document with SEBI), with breakup of the amount as actual and projection and next three financial years. Projections are to be disclosed for such assets which are owned or proposed to be owned by the trusts before the allotment of units to the public.
In follow-on offer, projections should be only disclosed for assets or projects proposed to be acquired by the trust using proceeds of follow-on offer for the period and in the manner as done in cases of initial offer.
- Additional Disclosure Requirements for REITs/InvITs with Outstanding Borrowings
REITs/InvITs which have issued debt securities must comply with certain continuous disclosure obligations provided under SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations). Any material deviations in the use of issue proceeds of these securities from the objects of issue must be disclosed to the relevant stock exchange along with quarterly financial results. The disclosure requirement is applicable till proceeds have been fully utilized or the purpose for which the issue was made has been achieved. Further, additional ratios like distribution per unit, net operating income, net profit margin percent, current ratios are required to be mandatorily disclosed.
- Other Revisions to Promote Ease of Doing Business
SEBI has further proposed revisions in the framework for calculation of net distributable cash flows at the special purpose vehicle/ holding company level and at the trust level and in the format for disclosure of ‘statement of net assets at fair value’.
The following key changes have been proposed by SEBI to enhance investor protection:
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- Additional Disclosures for Follow-on Offer
Certain additional disclosures have been mandated by SEBI including disclosures related to history of distributions made for the last three financial years. Summary of the valuation of real estate assets and infrastructure assets of REITs and InvITs, specified in Schedule III of SEBI (REITs) Regulations and SEBI (InvITs) Regulations, 2014 respectively, as per the latest valuation report must be disclosed. If there is a material change in the valuation after the latest valuation report, valuation of such assets must be retaken prior to filing the follow-on offer document.
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- Aligning Disclosure Requirements for Financial Results with LODR Regulations
SEBI has proposed revisions to the disclosure requirements for financial results to align the provisions with SEBI LODR Regulations. The proposal includes revisions to the frequency and time period for disclosing financial results to the stock exchange, nature and format of financial information to be disclosed in standalone and consolidated statements and preparation of financial statements as per Schedule III of Companies Act, 2013 with certain exceptions and modifications. Further, annual financial statements submitted to stock exchanges must be audited whereas, other financial information may be audited or subject to limited review. In each case, audit/review must be carried out by a peer-reviewed auditor as per ICAI guidelines. Additionally, REITs/InvITs must disclose their net borrowings ratio as part of their quarterly and annual financial information in the format, as prescribed.
Conclusion:
The proposed revisions underscore SEBI’s ongoing efforts to align the regulatory landscape governing investment trusts with the existing SEBI regulations and ensure a balance between ease of doing business and investor protection.