SEBI Proposes Financial Disclosure Requirements in Offer Documents for REITs and InvITs

The Securities and Exchange Board of India (SEBI) introduced a draft circular on Friday, proposing that Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) align their financial disclosures in offer documents with public issue and listing regulations.

Understanding REITs and InvITs

REITs and InvITs serve as investment instruments that gather funds from investors to invest in real estate and infrastructure projects, respectively. These entities are publicly listed on stock exchanges, enabling investors to trade shares similarly to other listed companies.

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Key Proposed Amendments

• Financial Disclosures in Offer Documents: When REITs and InvITs seek to raise capital through Initial Public Offerings (IPOs), they must provide comprehensive financial disclosures. Under the proposed guidelines, even newly established trusts will be required to present combined financial statements, offering investors a complete overview of their financial health, including affiliated entities.
• Ongoing Compliance Post-Listing: After listing on the stock exchange, these investment trusts will be required to maintain transparency by regularly sharing financial updates, mirroring the disclosure norms applicable to listed companies. The changes include:
• Audited Financial Statements for Follow-on Offerings: If a REIT or InvIT seeks to raise additional funds through follow-on offerings, it must provide consolidated, audited financial statements instead of summarized versions.
• Elimination of Condensed Financial Statements: Presently, trusts can submit summarized financial reports (known as "condensed financial statements"), which may not offer a detailed financial picture. SEBI now proposes to eliminate this option, enforcing stricter full-disclosure standards.
• Quarterly Reporting: Instead of semi-annual updates, SEBI suggests that REITs and InvITs report on fund utilization every quarter. This measure aims to enhance transparency and keep investors informed about the deployment of funds.
• Net Borrowing Ratio Disclosure: REITs and InvITs will be required to disclose their net borrowing ratio—representing the proportion of debt relative to total assets—in their financial statements. This will provide investors with a clearer understanding of the trust's financial standing, particularly concerning its debt obligations.

Why the changes?

These proposed changes stem from recommendations by the Working Group on Ease of Doing Business for REITs and InvITs, inputs from the Indian REITs Association and Bharat InvITs Association, and SEBI’s internal deliberations.

Furthermore, SEBI has suggested that REITs and InvITs must disclose combined financial statements for IPOs, regardless of their operational history. Follow-on offers will also need to include audited consolidated financial statements, with links to individual audited reports available on their websites.

To strengthen investor protection, SEBI aims to eliminate the option of presenting condensed financial statements both in offer documents and on an ongoing basis post-listing. This move aligns REITs and InvITs with the ICDR (Issue of Capital and Disclosure Requirements) regulations and LODR (Listing Obligations and Disclosure Requirements) norms.

Additionally, the draft proposal recommends reducing the reporting interval for deviations in the use of funds raised through debt securities from the current half-yearly requirement to a quarterly submission.

The circular also mandates the disclosure of the net borrowing ratio in financial results, along with specific financial ratios for REITs and InvITs that have outstanding borrowings.

SEBI has invited public feedback on these proposed financial disclosure and compliance norms by March 7, through an online web-based form.