EMPOWERING UNITHOLDERS: SEBI’S CIRCULAR ON BOARD NOMINATION RIGHTS FOR InvITs AND REITs

INTRODUCTION

The Securities and Exchange Board of India (SEBI) vide its powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Regulation 4(2)(h) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and Regulation 4(2)(g) of the SEBI (Real Estate Investment Trusts) Regulations, 2014 issued circular no. SEBI/HO/DDHS-PoD-2/P/CIR/2023/153ⁱ and circular no. SEBI/HO/DDHS-PoD-2/P/CIR/2023/154ⁱⁱ on September 11, 2023 (collectively referred as “Circulars”) for infrastructure investment trusts (“InvITs”) and real estate investment trusts (“REITs”) respectively. The Circulars deals with the rights of the unitholders of InvITs and REITs in India to nominate directors to the board. Further, it clarifies the rules and regulations regarding this aspect for managing the trusts.

The key highlights of this circular:

1. Eligible Unitholders: Eligible unitholders are those with 10% (ten percent) or more units, either by themselves or as part of a group. Circulars lays out the process for them to use their nomination rights to nominate any person for appointment as unitholder nominee director (“Director”).


2. Qualification guidelines for appointment as the Director: The board of directors of the investment manager in case of InvITs and manager in case of REITs (manager) shall create a set of rules regarding Directors. This includes their qualifications, evaluation, renumeration/ sitting fees, removal/ resignation, their role on committees and the board. Such policy shall be displayed on the trusts’ website. Director to recuse himself from voting on transaction where the unitholder appointing him is a party. Detailed eligibility criteria for Director are given in Annexure B of the Circulars stressing the need for them to be:
   
   
   1. Shall be ‘fit and proper’ based on the criteria specified under Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008ⁱ;
   2. Shall be free from any default or fraudulent activities;
   3. Shall not be a disqualified director under the list of disqualified directors issued by the Ministry of Corporate Affairs and is not barred from acting as a director or member of management by any court, regulatory or supervisory authority; and
   4. Shall in any capacity either directly himself or been a promoter or director or person in control of an entity not to be barred to access the capital markets by the board or any authority.


3. Rules for first time nomination after the issuance of this circulars: Eligible unitholders have the right but not the obligation to appoint 1 (one) Director, subject to the unitholding as specified. Unitholders cannot double dip by participating in more than 1 (one) nomination process. Eligible unitholder(s) interested in exercising their nomination right shall inform the manager through a written notice within 10 (ten) days of receipt of the intimation. They also shall inform the manager in writing of their proposed candidate for the position of Director along with the details of the Director’s eligibility. Once the eligibility of a Director is confirmed, the investor manager shall take necessary steps to complete the appointment of the Directors within 30 (thirty days) from the date of such confirmation. In case, the proposed candidate is not eligible, the eligible unitholder shall submit details of another candidate within 10 (ten) days from the date of the receipt of the communication on the same received from the manager.


4. Rules for subsequent nomination by unitholders on an annual basis: After receiving a written intimation by the investor manager within 10 (ten) days from the end of each financial year, the unitholder(s) can exercise their nomination right following a similar procedure implied for first time nomination of the Director as mentioned above.


5. Directors shall discontinue to remain on the board of directors of the manager if:
   1. its nomination is withdrawn by the eligible unitholder(s);
   2. change in the Director is requested by the eligible unitholder(s);
   3. eligible unitholder(s) falls below the required threshold; and
   4. where the Director is unable to serve or has resigned or been removed from the board of directors of the manager.


6. Review of unitholding by the manager: The investor manager shall conduct a monthly review of unitholders holding to ensure continuous compliance with the 10% (ten percent) ownership threshold as mandated by the regulatory provisions and submit a report of the same to the trustee of the trusts.


7. Procedure for change in Director or withdrawal of nomination: If an eligible unitholder wants to withdraw their nomination, they shall inform the manager and the Director of the same by following the procedure same as that for nomination. And as a result, the Director shall resign from the position.


8. Vacating of office of the Director:
   1. In case the unitholder looses its eligibility to appoint the Director it shall inform the same to the manager and the Director to step down from the board of directors of the manager within 2 (two) working days.
   2. In case of death or permanent disability of the Director, the eligible unitholder may propose another individual as a replacement.
   3. Director can also be removed by the board of directors for reasons to be recorded in writing.

CONCLUSION

SEBI has made significant changes to how InvITs and REITs are managed. These changes are designed to make the management of these investment funds more transparent and accountable. One of the key changes is that the eligible unitholders now have the right to nominate members of the board of the InvIT and REITs. This means that investors who meet the criteria can have a say in how these trusts are run. Further, one of the impacts of the Circulars is that the trust deed and investment management agreement entered as per the Securities and Exchange Board of India (Infrastructure Investment Trusts) (Second Amendment) Regulations, 2023 and the Securities and Exchange Board of India (Real Estate Investment Trusts) (Second Amendment) Regulations, 2023 shall stand amended to provide board nomination rights to eligible unitholder(s) within a period of 6 (six) months from the date of the Circulars.

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1. https://www.sebi.gov.in/legal/circulars/sep-2023/board-nomination-rights-to-unitholders-of-infrastructure-investment-trusts-invits-_76708.html
2. https://www.sebi.gov.in/legal/circulars/sep-2023/board-nomination-rights-to-unitholders-of-real-estate-investment-trusts-reits-_76709.html
3. https://www.sebi.gov.in/legal/regulations/aug-2021/securities-and-exchange-board-of-india-intermediaries-regulations-2008-last-amended-on-november-17-2021-_38453.html