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The nominee director will work to protect the rights and interests of the unitholders, ensuring that their concerns are brought before the board for consideration
On September 11, 2023, the Securities Exchange Board of India (SEBI) issued two circulars that empower unitholders of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) with the authority to nominate a Unitholder Nominee Director to the Board of Directors of the Investment Manager company.
What is Real Estate Investment Trust and Infrastructure Investment Trust?
A Real Estate Investment Trust (REIT) and an Infrastructure Investment Trust (InvIT) are investment vehicles structured as trusts. They typically involve a Sponsor, Trustee, Manager, and Unitholders. REITs primarily invest in real estate properties, while InvITs focus on infrastructure projects. The income generated from these investments is distributed among the unit holders, providing them with a share of the earnings from the real estate or infrastructure ventures.
Who Is A Nominee Director?
A nominee director is an individual appointed to a Board of Directors to represent the interests of those who have nominated them. Their role is to advocate for the concerns and viewpoints of the nominating parties during board decision-making processes. Typically, financial institutions and government entities appoint nominee directors to safeguard their interests.
In this context, the SEBI circular effectively enables unitholders to nominate their own director to the board. This nominee director will work to protect the rights and interests of the unitholders, ensuring that their concerns are brought before the board for consideration. This mechanism helps in ensuring that the voice and interests of the unitholders are adequately represented and not adversely affected.
What Does The New Circular Say About The Appointment of Nominee Director By Unit Holders?
The Securities Exchange Board of India has issued two similar circulars that enable unitholders of both Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to appoint a nominee director to the board of directors of the investment manager. This nomination can be made if the unitholders, either individually or together, hold a minimum of 10% of the total outstanding units of the respective REIT or InvIT.
The two circulars provide clarity that eligible unitholders have the right, though not an obligation, to nominate an individual for appointment as a unitholder nominee director.
Additionally, the circulars impose an obligation on the investment manager to conduct a monthly review, within 10 days following the end of each calendar month, to confirm whether the eligible unitholder(s) who have exercised the right to board nomination still maintain the required number of units in the REIT/InvIT. The investment manager must then report this information to the Trustee of the REIT/InvIT.
Furthermore, the circulars state that if the right to appoint a nominee director has already been exercised by an individual in their capacity as a shareholder of the manager or as a lender to the manager, they are not eligible to nominate or participate in the nomination of a Unitholder Nominee Director.
Additionally, the circulars grant authority to the Board of Directors of the Manager to formulate a policy. This policy should outline matters related to remuneration, sitting fees, the process of removal or resignation of Unitholder Nominee Directors, and the roles of the Nomination and Remuneration Committee and the Board of Directors in these matters. Importantly, this policy must be made available on the website of the respective REIT/InvIT.
According to the circulars, if multiple unitholders are pooling their units to exercise the nomination right, their notice must also specify up to two unitholders who will serve as authorized representatives for the group of eligible unitholders.
Once the manager has considered the eligibility criteria outlined by SEBI and the policies established by the board, they are obligated to take the necessary actions to complete the appointment of the nominee director to the Board of Directors within thirty days from the date of confirmation.
In the event that the proposed candidate is found to be ineligible, the manager is required to document the reasons for this decision in writing. The manager must then communicate these reasons to the eligible unitholders within ten days of receiving the notice from the eligible unitholder. The circular permits unitholders to propose an alternative nominee within 10 days if their initial nominee is rejected by the manager.
The circular places an obligation on the manager to send a written notification to all unitholders via their email addresses within ten days following the conclusion of each financial year. This notification requests that unitholders inform the manager if any eligible unitholder intends to exercise the right to nominate a Unitholder Nominee Director.
The Unitholder Nominee Director is allowed to be on the Board of Directors of the Manager unless:
Furthermore, if any unitholder acquires units reaching or exceeding the prescribed threshold of ten percent of unitholding during a specific financial year, that unitholder is entitled to exercise the nomination right only in the subsequent financial year.
In the event that eligible unitholders or a group of unitholders who have appointed the nominee director wish to withdraw their nomination, they are required to inform both the Manager and the Unitholder Nominee Director of their decision. Following this, the Unitholder Nominee Director is obligated to promptly resign or step down from the Board of Directors of the Manager.
If, at any time, the unitholder's holding falls below the 10% threshold of the total issued units, either due to the issuance of new units or eligible unitholders selling their units, they must promptly inform the Manager within two working days of such a change. In response to this change, the Unitholder Nominee Director is also required to resign or step down from the Board of Directors of the Manager within two working days.
In the event of the appointed nominee director's death, the unitholders are permitted to propose a new nominee for the appointment.
Furthermore, the circular has vested the Board of Directors with the authority to remove a Unitholder Nominee Director from office. This removal must be justified in writing, including reasons such as the Unitholder Nominee Director no longer meeting the eligibility criteria or other requirements, as specified in the policy.
a) The person should be “fit and proper” based on the criteria specified under Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, as amended.
b) The person is not a willful defaulter or fraudulent borrower, or a promoter or director or person in control of a company or entity categorized as such by any bank or financial institution in accordance with the guidelines prescribed by the Reserve Bank of India.
c) 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.
d) The person is not debarred from accessing the capital markets by the Board or any other authority.
e) The person is not or has not been a promoter or director or person in control of any company or entity which has been debarred from accessing the capital markets by the Board or any other authority
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