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SEBI issued a consultation paper in which it proposed to introduce subordinate units in REITs/InvITs.
According to the consultation paper, the sponsors of REITs/InvITs holding units of REITs/InvITs can issue their units in public after a certain lock-in period.
Explaining the concept of subordinate units, SEBI gave this example: If the sponsor values the asset at Rs. 1,000 crore assuming a rate of 10% annual revenue growth while the REIT observes a growth rate of 9%, resulting in a Rs. 900 crore valuation, the sponsor might buy ordinary units for Rs. 900 crore and the REIT may issue subordinate units to sponsor for Rs. 100 crores.
Subordinate units are the units issued to the sponsor for the valuation gap if agreed upon by the investors/unitholders.
The creation and issuance of subordinate units primarily aim to close potential valuation gaps arising from differences in asset valuation perceptions between the sponsor and the REIT/InvIT.
The conditions attached to the issuance of subordinate units specify that, if the REIT outperforms its benchmark and achieves a pre-agreed average annual revenue growth rate at the end of five years of tenure, the subordinate units will either convert to or be reclassified as ordinary units.
The market regulator sought your comment on these proposals. You can submit your feedback to SEBI through a web based link by clicking here or by sending an email to riteshn@sebi.gov.in, pawanc@sebi.gov.in and barung@sebi.gov.in at by Jan 31, 2024.