A BORROWED RULE, NOT A BORROWED CONCEPT: SEBI’S DEPOSITORY RECEIPT FRAMEWORK FOR REITS AND INVITS

This piece is authored by Hiya Ghanghoria and Raghav Kumar, second-year and third-year B.A. LL.B (Hons.) students, respectively, at Gujarat National Law University, Gandhinagar.

INTRODUCTION

The Securities and Exchange Board of India’s  (“SEBI”) August 2026 consultation paper proposes letting Real Estate Investment Trusts (“REITs”) and publicly listed Infrastructure Investment Trusts (“InvITs”) issue Depository Receipts (“DRs”) against their units, opening a foreign-currency route for investors to hold these instruments as a foreign currency instrument listed on an overseas exchange. This is an option that does not currently exist, even though foreign investors can already invest in REIT/InvIT units directly under Rule 6(c) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). These rules permit investment in units of an “investment vehicle”; a term Rule 2(ae) defines to include REITs and InvITs).

Annexure A to the consultation paper contains the draft operational framework for the proposed DR mechanism. It sets out eligibility conditions, an approval process spanning offer document filing, SEBI’s comments, exchange approval, unitholder approval, and disclosure obligations for filings made on the international exchange. This framework is not a standalone creation. SEBI states it is prepared based on the Equity DR Framework identified precisely as Section No. 22, “Framework for issue of Depository Receipts,” under Chapter 1, “Trading” of SEBI’s Master Circular for Stock Exchanges and Clearing Corporations dated 30 December 2024. A comparison of the changes made to adapt this equity regime to the REIT/InvIT trust structure is attached as Annexure B.

One provision deserves closer scrutiny. The Equity DR Framework fixes a DR’s price by reference to the price for the corresponding public offer, preferential allotment, or qualified institutions placement under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”). ICDR governs equity issuances by companies. REITs and InvITs are trusts. Annexure A, at paragraph 11(1), states that for a simultaneous REIT/InvIT listing and DR issuance, the benchmark becomes “an initial offer / preferential allotment / institutional placement under the (Real Estate Investment Trusts) Regulations, 2014 / SEBI (Infrastructure Investment Trusts) Regulations, 2014.” ICDR does not survive into that clause. But Annexure A, at paragraph 11(2), which governs every subsequent DR issuance, names no regulation at all, adapted or otherwise; it is this clause, not the pricing mechanism as a whole, that is left unexamined.

A FORMULA PORTED WITHOUT ITS JURISDICTION

REIT and InvIT units are beneficial interests in a trust, registered under the REIT Regulations, 2014, not equity shares of a company. ICDR defines an “issuer’’ as a company or body corporate authorised to issue specified securities, and “specified securities” as equity shares and convertible securities (Regulation 2(1)(aa), 2(1)(eee)), with no equivalent category for a trust unit.

The clauses meant to enable this framework are in the REIT and InvIT Regulations themselves: Regulation 14(12A) of the REIT Regulations and the parallel Regulation 14(4)(ma) of the InvIT Regulations. Both are bare as they delegate eligibility, pricing and disclosure content entirely to a circular the Board has not yet issued, authorising action only “in such manner as may be specified by the Board.” The result is a framework in which key investor-protection safeguards, including pricing, remain contingent on a subsequent circular rather than being prescribed within the regulations themselves.

The question of whether REIT and InvIT units should be reclassified as equity remains unresolved for this purpose, since equity under Section 43 of the Companies Act attaches to the share capital of a company, raising the question of whether a trust can issue equity at all. SEBI’s September 2025 Board decision reclassified REIT units as equity-related instruments for mutual fund investment purposes, but left the trust-versus-equity question and ICDR's applicability untouched. This paper is where the deferral stops paying for itself. Annexure A does not ask whether a unit is close enough to equity to deserve the label. That question does not need resolving here: the clause governing simultaneous listings already substitutes the REIT and InvIT Regulations for ICDR by name. The clause governing subsequent issuances is where the label question actually bites, since it names no regulation, borrowed or otherwise, for the manager of the REIT or InvIT (the Manager) to test against.

A RULE THAT TRAVELS SELECTIVELY

Equity DR Framework, in accordance with clause 2.17, specifies its benchmark of the domestic transaction as “a public offer / preferential allotment / qualified institutions placement under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018,” and thereby fixing the floor at that price “to domestic investors under the applicable laws.” On the other hand, the relevant provisions regarding the simultaneous listing of REIT/InvIT and DR issue are enshrined in Annexure A at 11(1), which specifies that the first part of the sentence should be replaced by “SEBI (Real Estate Investment Trusts) Regulations, 2014 / SEBI (Infrastructure Investment Trusts) Regulations, 2014” instead of ICDR.

The real gap, then, is one of degree rather than presence or absence: paragraph 11(1) narrows the field to three named modes without saying which pricing formula applies to which of them; while paragraph 11(2), which governs every subsequent DR issuance and will cover the majority of real world issuances once a REIT or InvIT is already trading, does not narrow the field at all; it only states that units “shall be issued at a price, not less than the price applicable to a corresponding mode of issue of such units to domestic investors under the applicable laws,” naming no regulation, adapted or otherwise.

A working pricing mechanism already exists for one of the three modes identified in paragraph 11(1), although no corresponding mechanism is specified for the other two. Institutional placements of REIT and InvIT units have been priced since 27 November 2019 under a formula revised on 5 July 2023: the issue price cannot be lower than the average of the weekly high and low closing prices during the two weeks preceding the relevant date, subject to a discount of up to five percent with unitholder approval. The formula is now incorporated in Chapter 10 of the REIT Master Circular and Chapter 7 of the InvIT Master Circular, both dated 11 July 2025. The issue, therefore, is not merely the absence of a cross-reference. It is also whether this formula was intended to govern the two modes specified in paragraph 11(1), and whether SEBI contemplated a different pricing mechanism for paragraph 11(2), for which no corresponding regulatory provision presently exists. This paper addresses only the latter question. Paragraph 11(2) is likely to govern much of the practical issuance of securities once a REIT or InvIT is listed, while the treatment of the modes under paragraph 11(1) remains unresolved.

But the framework’s checkpoints cannot bridge this problem; instead, they perpetuate it. The filing of the offer document allows the SEBI reviewer to detect the flaw in the pricing structure. However, the reviewer is not provided with any formula against which to assess the price of a subsequent issuance since the clause only mentions the floor of “applicable laws”. The Board’s discretion in cases of non-compliance allows SEBI to fix the flawed pricing issue after it has occurred, which essentially means the recognition that the general rule requires constant modification.

This inference concerns the Manager, though not with the same scope of interpretation used in standard REIT investment decisions. Under Regulation 10(1) of the REIT Regulations, “the Manager is to have the right to make investment decisions with respect to the underlying assets of the REIT.” This provision concerns actions taken concerning the real estate held by the REIT, not an attempt to resolve the ambiguity of a cross-reference in a pricing circular. No provision specifically delegates this interpretive duty to the Manager. However, it is likely that the task will fall to the Manager because the Manager must certify the offering document, and must choose a figure regardless of how it is framed in the Regulations, even if this occurs only as a matter of practical inevitability. Unless there is a provision to the contrary, the decision whether the Master Circular formula already used in the domestic institutional offering should apply to the DR issue remains the Manager’s responsibility.

The narrowest fix uses the delegation the paper already proposes. Regulation 14(12A) and 14(4)(ma) authorise the Board to specify the manner. SEBI should use that authority to extend, expressly the  same substitution already made for simultaneous listings to the clause governing every subsequent DR issuance, naming Chapter 10 of the REIT Master Circular and Chapter 7 of the InvIT  as governing formula.  It requires SEBI to complete, in the circular contemplated by Annexure A, a substitution it has already made once. The formula-to-mode mapping within paragraph 11(1) does not entail which of the three named modes the Master Circular formula actually prices, and whether the same formula extends to initial offers and preferential allotments at all, is a separate gap this fix does not close, and the same circular should address it.

A stapled structure, involving pairing the unit with a share in the Manager entity, remains on way to resolve the broader trust versus equity question this article raises in passing; and is worth recording as an available alternative, though it is a heavier tool than the fix above requires. Kevin Davis’s 2017 critique of Australian stapled structures documents governance and transparency costs, particularly around externally managed funds; and a 2019 empirical study of Australian REITs and listed infrastructure funds found the structure itself associated with increased earnings management and lower financial disclosure quality. SEBI does not need to import those costs to solve a problem a single sentence in a forthcoming circular can close.

CONCLUSION

The deadline for submission of comments on this paper is 25 August 2026. This is the appropriate time to establish the benchmark for all future issues of DRs before the price-fixing clause on the first issue with respect to an undefined reference. Comments in Annexure A should ask SEBI to include for the substitution already made in the simultaneous listing clause in the clause for the  other future issues. “Borrowed ideas have a place in the new framework of regulation, but a borrowed method requires a defined place; until SEBI defines one for all issues following the first one, the price-fixing clause is just a matter of degree.”