Real Estate Investment Trust: Arjun Lall speaks on Embassy Blackstone REIT IPO

The Embassy Office Parks REIT IPO, backed by global private equity firm Blackstone Group and Bengaluru-based developer Embassy Property Developments Pvt Ltd, was subscribed 2.57 times during its initial share sale between March 18 and 20. The IPO saw the REIT raise a total of ₹4,750 crore (US$690 million)..This is the first ever Real Estate Investment Trust (REIT) in India – a major milestone in the real estate sector..It will also be Asia’s largest in terms of office portfolio area, with seven office parks and four office buildings spread across Mumbai, Bengaluru, Pune, and Noida, spanning 32.7 million square feet of leasable area..Cyril Amarchand Mangaldas is the Indian legal counsel to Embassy REIT, the Manager, the Embassy Sponsor, and the Blackstone Sponsor. Clifford Chance (lead Partner Rahul Guptan) acted as the International legal counsel for Blackstone and Embassy Property Developments. Simpson Thacher & Bartlett is the International legal counsel for the Blackstone Sponsor..S&R Associates (lead Partner Sandip Bhagat) acted as domestic legal counsel for the Lead Managers and Latham & Watkins were the International counsel..We speak to Cyril Amarchand Mangaldas Partner Arjun Lall, the lead partner who oversaw the listing of India’s first REIT, on what were the challenges, how REIT is different from other offerings, and much more..The offer document says that the first filing of Embassy REIT was in August 2017. Since this was the first REIT without any precedents, how challenging was it? .The entire process has been challenging and exciting from the get-go. August 2017 was only the registration of the Embassy REIT as the first REIT in India. But work on this transaction first began in 2013, even before the REIT Regulations were notified. It was a collaborative process driven by the lead merchant bankers with the regulators, and supported by the sponsors and advisors like us, working to ensure that the regulatory framework for this product married the best of international practices with peculiarities associated with the Indian real estate sector..While the REIT Regulations were notified in 2014, there were several conceptual issues that the group grappled with at the very beginning – from whether REIT units would be considered ‘securities’ for the purposes of the SEBI framework, to what classes of investors could invest in REIT units..Similarly, from a process and disclosure standpoint, it took some time before there was sufficient clarity on issues such as the form and manner of preparation and presentation; of financial information and projections of the REIT; the manner and timing of acquisition of the asset portfolio; the manner in which REIT IPOs could be underwritten; whether REIT IPOs could include an offer for sale component, etc..Aside from the regulations, there were other teething issues typical to any nascent regulatory environment which the working group faced – absence of a separate trading platform for REITs on the stock exchanges, requirements for listing and trading approvals for REITs, as well as procedural formalities associated with the issue and allotment of units..Resolution of these matters required the concerted efforts of several regulators and government departments other than SEBI and stock exchanges, including the RBI, the MCA, the PFRDA, the IRDAI etc. Fortunately, each of the regulators and government departments were receptive to the concerns and issues highlighted, and worked together with SEBI and the rest of the working group over the last few years towards the evolution of a comprehensive regulatory framework for the setting up and listing of REITs..As a lawyer for the issuer, what challenges did you see in an REIT as opposed to a regular IPO/QIP?.We wouldn’t call them challenges per se, but there are certain intrinsic differences in setting up and listing a REIT vis-à-vis an offering of equity shares, which would require issuers and promoters to approach the process differently. For instance:.The promoter equivalents (called sponsors under the REIT regime) are required to cede control of the portfolio assets to the REIT and the management and control of the assets vests with an independent REIT manager. While sponsors will hold units in the REIT and enjoy rights as unit holders, all investment and management decisions in relation to the assets will be undertaken by the REIT manager.Given the prevalent holding structures in the Indian real estate sector, which involves co-mingled assets, multi-level holding structures, commercial arrangements with landowners including JDAs, JVs etc, a significant level of thought process and restructuring of asset holdings may be required to ensure compliance with the REIT Regulations. In addition to the extensive documentation involved in the process (depending on the manner in which the transaction is structured), management time will also be diverted towards negotiations and discussions with various stakeholders in the assets to ensure their buy-in.Linked to the above are the regulatory approvals required for the acquisition of assets including approvals from the SEZ Authorities, state-specific land development authorities, etc, depending on the nature of the asset.Given the interplay between the sponsors, sponsor group, manager and their directors and KMPs, a comprehensive corporate governance framework will need to be put in place to address potential conflicts of interest.There will also be the involvement of intermediaries which are unique to the REIT IPO process – valuers, for instance. Similarly, there will be disclosures in the offer documents such as projections, combined financials, etc. which are not typical in an IPO/QIP document..Since this transaction requires a large amount of real estate due diligence, did your firm undertake all the diligence, or was it outsourced?.Yes, there was a substantial amount of due diligence involved, considering the holding structure of the Embassy REIT, comprising of 10 special purpose vehicles, a holding company, and an investment entity. The due diligence of all these entities forming part of the Embassy REIT holding structure was undertaken by our firm. The title due diligence responsibility, however, was shared by multiple law firms (based on historical familiarity with the asset), including by our firm. All title reports not prepared by us were reviewed by us as counsel to the REIT and the Manager..Can you explain the REIT in a simple and easy manner?.A REIT or a real estate investment trust is an investment vehicle set up as a trust under the Indian Trusts Act, 1882.The sponsors of a REIT (akin to promoters of a company) are the settlors of the trust. The sponsors are required to appoint a SEBI registered debenture trustee as the trustee of the REIT.The sponsors also have the primary obligation of transferring their interest in the portfolio assets to the REIT. The ownership of the property vests in the REIT and the unit holders are the beneficiaries of the REIT.The portfolio assets are held by the REIT directly or indirectly through one or two levels of holding companies/special purpose vehicles.The trustee is required to delegate all investment and management decisions to a manager appointed by it under the regulations.The manager is responsible for the operation, management as well as investment decisions of the REIT and the REIT assets.The REIT (i.e. the trust with its underlying portfolio assets) undertakes an IPO of units (each unit representing a beneficial interest in the assets of the REIT) and is listed on stock exchanges.The REIT is thereafter required to mandatorily distribute 90% of the net distributable cash flows arising out of the REIT assets to its unit holders, on a half-yearly basis..What is the tentative time period for a REIT to close? Is it the same time as that of an IPO?.A REIT listing can take anywhere between 6-9 months from obtaining REIT registration, which is approximately the same amount of time taken for an equity IPO..The REIT registration process itself could take between 1-3 months. The time frame is largely dependent on the readiness of the parties to the REIT, as well as the time taken in arriving at and implementing a viable holding structure for the portfolio assets..How large was the team that oversaw the entire process?.We had over 50 lawyers (including 15 partners) across practices, advising on various different aspects of the transaction, including the corporate restructuring, real estate diligence, financing aspects, regulatory interface, competition law, disputes, etc..Will this be a game changer for the Real Estate market?.Absolutely. The product was introduced by SEBI with a dual purpose of providing much-needed liquidity to the cash strapped real estate market, as well as providing public investors with a low-risk investment avenue. The response to India’s first REIT has been positive and encouraging as well, and the product has found takers amongst both institutional as well as non-institutional investors..The success of India’s first REIT is likely to give impetus to many more real estate developers to opt to monetise their assets through REITs in the near future.