The Securities and Exchange Commission of Pakistan (SECP) last week released a new set of guidelines for its fledgling Reit sector, a month after it gave the green light for the setting up of the country’s first Reit.
But industry executives are kicking up a fuss about a provision that requires Reit management companies to hold between 10%-15% of the Reit throughout its lifetime.
If the Reit is worth more than Rp5bn ($50m), the Reit manager can opt to bring in a strategic investor. Together they will have to be locked into at least 25% of the Reit.
This stake cannot be sold, traded, or pledged as collateral for debt, meaning that aside from dividends and the initial capital gain earned when the Reit is listed, the Reit managers will only be able to monetise their holdings if the trust is liquidated.
Those looking to inject their assets into Reits are meeting the regulator to contest the draft law because they believe the tighter requirements will roil the pipeline just as the sector is about to take off.
But the SECP deserves kudos for ensuring that investor protection takes precedence when the market is still in its infancy.
What the market does not need is a flood of issuance from companies that are just looking to make a quick buck. It is more important to have the right number of issuers with the right kinds of assets and long term investors.
No doubt this is a difficult balance for any regulator to get right, but by tightening the screws, the SECP is showing it has its priorities straight.
And it’s not as though the SECP’s actions are completely out of step with international standards. It is, after all, common practice for regulators to impose a moratorium on the equity held by the major shareholder for a certain period of time after an IPO, to ensure that they have skin in the game and remain committed to the listed entity.
India provides an instructive comparison. Its regulator, which last year moved to kick-start the country's Reit and infrastructure investment trust sector, said then that sponsors should hold a minimum 15% of any Reit. On top of that, sponsors must own at least 25% of the Reit for three years from the date of listing, the regulations had said at the time.
The safeguarding of investor interests is all the more crucial in Pakistan, which has had a less-than-ideal track record in the capital markets as well as an unpredictable stock market.
As Pakistan's Reit market matures, and as investors and issuers gain familiarity with the asset class, the SECP can loosen the reins and give some concessions to the industry. Market participants have the right to voice their concerns and lobby for terms that are favourable to them, but for now they should take this on the chin.
By taking a tough stance now, the regulator is ensuring the Reit market will have a strong base from which to grow.