Sebi For Interest Rate Derivatives On Hedging

New Delhi: Markets regulator Sebi has proposed allowing Real Estate Investment Trusts (REITs), Small and Medium REITs (SM REITs) and Infrastructure Investment Trusts (InvITs) to use interest rate derivatives for hedging risk. The Securities and Exchange Board of India (Sebi) has sought public comments on both consultation papers by November 13.

Also, the regulator has suggested approving locked-in units for REITs and InvITs to be transferred among sponsors and their groups, similar to rules for promoters in listed companies, to help sponsors manage their holdings without compromising ‘skin in the game’.

Additionally, Sebi has suggested permitting fixed deposits to be considered as cash equivalents when calculating leverage for REITs and InvITs, clarifying credit rating requirements for REIT and InvIT borrowings, and setting a timeline for filling vacancies on their boards and expanding the asset base for REITs and SM REITs.

The regulator has also proposed to permit REITs to invest in liquid mutual funds. It has suggested measures to facilitate ease of doing business for REITs and InvITs, along with investors' protection. According to its consultation paper, Sebi is considering allowing REITs and InvITs to hedge against interest rate fluctuations by using derivatives like interest rate swaps. This could help stabilise cash flows, reduce risks, and protect unitholder interests, especially for long-term infrastructure projects. It is also proposed to define ‘Common Infrastructure’ for REIT regulations.

To enhance business flexibility for REITs, it has been proposed to clarify that facilities like power plants, heating/cooling systems, water treatment, and waste treatment plants -- serving one or more REIT assets -- will qualify as ‘common infrastructure’ under REIT rules. This applies even if these facilities are not located within a single project due to their technical requirements. These facilities should supply and be used exclusively by REIT assets.