The Securities Exchange Board of India (“SEBI”) through circular no. SEBI/HO/DDHS-PoD-2/P/CIR/2023/154 and SEBI/HO/DDHS-PoD-2/P/CIR/2023/153, dated and in force since September 11, 2023, has set out the detailed procedure regarding appointment of nominee directors (“Unitholder Nominee Director”) on the board of the investment managers (“Manager”) of Real Estate Investment Trusts (“ReITs”) and Infrastructure Investment Trust (“InvITs”).

Regulation 4(2)(g) and Regulation 4(2)(h) of SEBI (Infrastructure Investment Trust) Regulations, 2014 (InvIT Regulation) and SEBI (Real Estate Investment Trusts) Regulations, 2014 (ReIT Regulation) respectively provide for the rights of unitholders of InvITs and ReITs. Proviso to the InvIT Regulation and ReIT Regulation, inserted previously vide, SEBI (Infrastructure Investment Trusts) (Second Amendment) Regulations, 2023 and SEBI (Real Estate Investment Trusts) (Second Amendment) Regulations, 2023 had introduced the right of unitholders to appoint Unitholder Nominee Directors.

The minimum criteria for a unitholder to be eligible is to hold at least 10% (ten percent) (“Minimum Threshold”) or more of the total outstanding units of the InvIT or ReIT, as the case may be, either individually or collectively. The Unitholder Nominee Director appointed in accordance with these regulations shall be non-independent directors. Following conditions have been laid down for the nomination:

1. Unitholders holding Minimum Threshold or more (“Eligible Unitholders”) shall be eligible to nominate 1 (one) director. However, in the event a unitholder already has the right to appoint a nominee director owing to its capacity as a lender to, or shareholder of the Manager, the unitholder notwithstanding its unitholding shall not be entitled to participate in the nomination of the Unitholder Nominee Director.
2. In the event the unitholding is grouped together to qualify for the Minimum Threshold, the unitholder once grouped shall not be eligible to participate in any other group of Eligible Unitholders.

Procedure for nomination of Unitholder Nominee Director:

The circulars further provide for the procedure for first time nomination, which is briefly set out below:

1. The Manager of the ReIT/InvIT shall intimate all unitholders by October 10, 2023, regarding the right to nominate a Unitholder Nominee Director and the Eligible Unitholders shall, within 10 (ten) days, i.e., by October 20, 2023, inform the Manager regarding their wish to appoint a Unitholder Nominee Director.
2. The notice shall set out the details of unitholding along with an acknowledgment that the unitholding shall be maintained at Minimum Threshold, failing which the right to nominate shall fall off.
3. In the event a unitholder acquires a unitholding above the Minimum Threshold in a financial year, he/she shall be entitled to nominate for Unitholder Nominee Director in the next financial year.
4. For the purpose of the first nomination, the unitholding pattern as of September 30, 2023 shall be taken into consideration.
5. In the event multiple unitholders aggregate their unitholding, such unitholders shall also declare an authorized representative, who shall be deemed to be representative of the unitholders for all communications with the Manager.
6. The eligibility of a nominee director shall be confirmed by the Manager, based on evaluation by its nomination and remuneration committee and/or the board of directors of the Manager.
7. Subsequent to confirmation of the eligibility of the nominee director, the appointment shall be completed by the Manager within 30 (thirty) days. In the event the nominee director is not found eligible/suitable, based on evaluation of the board of director or nomination and remuneration committee of the Manager, the Manager shall communicate the same in writing to Eligible Unitholders within 10 (ten) days of receipt of notice from Eligible Unitholders and the Eligible Unitholders shall be entitled to nominate another candidate within a further period of 10 (ten) days.

Subsequent nominations:

The provisions regarding nomination on an annual basis have also been set out in the circulars. The provisions set out above shall apply mutatis mutandis to subsequent nominations. However, the unitholding for being considered Eligible Unitholder shall be reckoned as of March 31, 2023.

Eligibility conditions for Unitholder Nominee Director:

Annexure B to the circulars set out the criteria for eligibility of a Unitholder Nominee Director, which shall be adhered to, in addition to the policy adopted by the Manager. Following are the conditions that have been laid down:

1. Person fulfils the fit and proper criteria specified under Schedule II of the SEBI (Intermediaries) Regulations, 2008;
2. Person is not a willful defaulter or fraudulent borrower or or a promoter or director or person in control of a company or entity categorized as such by any bank or financial institution;
3. The person’s name does not appear under any list of disqualified directors issued by the Ministry of Corporate Affairs and is not debarred from acting as a director or member of management by any court, regulatory or supervisory authority; or
4. The person is not debarred, nor is/has been a promoter or director or person in control of any company or entity debarred from accessing the capital market by SEBI or any other authority.

Review of unitholding of Eligible Unitholders:

1. The Manager of the ReIT or InvIT, as the case may be, shall within 10(ten) days of end of each calendar month, review the unitholding of each Eligible Unitholder who have exercised the right to nominate a Unitholder Nominee Director, and shall submit the report to the trustee of the ReIT/InvIT stating whether the Eligible Unitholder continues to have unitholding above the Minimum Threshold.
2. In the event upon review, it is found that the Eligible Unitholder does not have the unitholding above the Minimum Threshold, the Unitholder Nominee Director shall be required to resign from the board of the Manager of the ReIT/InvIT.

Grounds of vacating of office and conditions of service of Unitholder Nominee Director:

In the following events, the Unitholder Nominee Director shall have to vacate his position:

1. If the unitholding, either individual or collective, of Eligible Unitholder falls below the Minimum Threshold, then the Manager shall be informed within 2 (two) working days and the Unitholder Nominee Director shall resign from the board within 2 (two) working days.
2. If the unitholding, either individual or collective, of Eligible Unitholder falls below Minimum Threshold on account of fresh issuance of units, then the Manag shall be informed within 2 (two) working days and the Unitholder Nominee Director shall resign from the board within 2 (two) working days.
3. Eligible Unitholder either withdraws or requests a change of Unitholder Nominee Director.

Additionally, the Unitholder Nominee Director shall be replaced in case of death or permanent disability, and the Eligible Unitholders may propose another individual as a replacement. Further, the board of Manager shall have the power to remove a Unitholder Nominee Director for reason to be recorded in writing.

Amendment of trust deed and investment manager agreement:

The circulars provide that, in view of the SEBI (Real Estate Investment Trusts) (Second Amendment) Regulations, 2023 notified on August 17, 2023, the trust deed and investment management agreement shall be amended or be deemed to incorporate provisions to provide board nomination rights to Eligible Unitholders in the manner specified in the circulars.

Further, the trustee and the Manager are required to, within a period of 6 (six) months from the date of these circulars, ensure that the trust deed and the investment management agreement of the ReITs and InvITs are amended to provide for nomination and appointment of Unitholder Nominee Directors on the board of directors of the Manager by Eligible Unitholder(s).

Please find copies of the relevant circulars here and here.

This update has been contributed by Rachika Agrawal Sahay (Partner) and Mrinal Mishra (Associate).

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