SEBI Reforms: Impactful Proposals for AIF regulations and REIT guidelines

A dive into SEBI's recent amendments impacting Alternative Investment Funds and Real Estate Investment Trusts.

The Securities and Exchange Board of India (SEBI) recently approved amendments to facilitate Small & Medium Real Estate Investment Trusts (SM REITs) and to strengthen compliance and investor protection in Alternative Investment Funds (AIFs).

Facilitation of Small & Medium REITs (SM REITs)

SEBI has proposed amendments to the SEBI (Real Estate Investment Trusts) Regulations, 2014 to create a new regulatory framework for SM REITs. These amendments proposed to REIT guidelines aim to establish a framework for SM REITs with a minimum real estate asset value of at least Rs. 50 crores, compared to the earlier Rs. 500 crore for existing REITs. SM REITs will have the flexibility to create separate schemes for owning real estate assets through special purpose vehicles constituted as companies.

The proposed regulatory framework for SM REITs will inter-alia include:

• structure of SM REITs;

• migration of existing structures meeting specified criteria;

• obligations of the investment manager including net worth, experience, and minimum holding;

• investment conditions, minimum subscription;

• distribution norms, valuation of assets, and more.

Amendment to SEBI (Alternative Investment Funds) Regulations, 2012

In a move to facilitate ease of compliance and enhance investor protection in Alternative Investment Funds (AIFs), SEBI has approved several proposals to AIF Regulations:

1. Dematerialization of Investments: Post September 2024, any fresh investment made by an AIF is proposed to be held in dematerialized form. This matches the deadline issued by the Ministry of Corporate Affaairs to dematialise the securities of Private Limited Companies.

   1. Investee companies are mandated under any other to law to convert their securities to demat or

   2. AIF alongwith other Intermediaries which are mandated to hold in demat form has 'control' in the investee company.

   3. Liquidation schemes of AIFs;

   4. Tenure of the AIF is going to end within one year from the issue of the proposed notification;

   5. Schemes of an AIF which are in extended tenure as on the date of issuance of the proposed notification.

2. Mandatory Appointment of Custodian: SEBI has propsed to extend the mandate for appointing a custodian to all AIFs. Previously applicable only to Category III AIFs and Category I and II AIFs with a corpus exceeding Rs. 500 crore, this mandate now applies across all AIFs. AIFs may appoint a custodian who is an associate of the manager or sponsor, subject to conditions similar to those for a related party of a sponsor of a Mutual Fund to act as its custodian.

The proposed SEBI reforms proposed to both, AIF regulations and REIT guidelines, may impact the AIF and REIT industry, fostering a more structured framework for smaller REITs and enhancing compliance and investor safeguards for AIFs & REITs. These proposed changes aim to streamline operations, bolster transparency, and provide investors with a more secure investment environment. The detailed Notification is not yet released.