SEBI (Infrastructure Investment Trusts) (Amendment) Regulations, 2024: Revamping InvITs

Introduction

The Securities and Exchange Board of India (SEBI) introduced the Securities and Exchange Board of India (Infrastructure Investment Trusts) (Amendment) Regulations, 2024 on May 27, 2024, which marked a significant revision to the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014. The aforementioned Amendment seeks to improve the Infrastructure Investment Trust (InvIT) regulatory framework, promoting increased operational efficiency, flexibility, and transparency. The goals of this thorough update are to safeguard investor interests, close valuation gaps, and improve asset purchase procedures.

The introduction of subordinate units is one of the Amendment Regulations' most significant modifications. These units are a brand-new class of securities that stand apart from regular units and are intended to offer a flexible payment option for asset purchases. Subordinate units are only available for issue by privately put InvITs to sponsors, their associates, and the sponsor group as part of the consideration for infrastructure projects. Subordinate units have no voting or distribution rights. The goal of these units is to close any valuation and cash flow gaps that might occur during transactions between the sponsor and the InvIT.

What are the Significant Changes Made to the InvIT Regulation?

Significant modifications to the InvIT Regulations have been made by SEBI with the Amendment Regulations, with particular attention paid to the structure for issuing Subordinate Units. Following are the important modifications/amendments that have been brought under the Regulation:

1. Basic for Subordinate Division: provides guidelines for the issuing of Subordinate Units, which are later transformed into Ordinary Units. This serves as the foundation for Subordinate Divisions. These units and other InvIT Regulations will govern their management.
2. Exclusion from Minimum Unitholding Calculation: In accordance with Regulations 12(3) and (3A) of the InvIT Regulations, Subordinate Units are not included in the total outstanding units of the InvIT for calculating the minimum unitholding requirements of sponsors and sponsor groups.
3. Single Class of Units: Except for Subordinate Units, which have no voting or distribution rights, InvITs are required to maintain a single class of units. Equal distribution and voting rights are required for each Unit.
4. Rights of Significant Unitholders: Unitholders who control at least 10% of all outstanding units, either individually or collectively, are granted specific rights. Among them are:
   • The right to suggest a single individual for the board of directors of the investment manager. The nominee for director is obliged to abstain from voting on such transactions if they, their connections, or the unitholder who nominated them have a conflict of interest.
   • It is essential to adhere to the stewardship principles listed in Schedule VIII of the InvIT Regulations

These revisions attempt to improve transparency, governance, and equitable treatment of all unitholders by adding flexibility to the issuance and management of subordinate units.

Subordinate Units Only by Privately Placed InvITS:

All investors in InvITs were granted equal voting and distribution rights according to their holdings before the Amendment, as long as the InvITs issued only one class of ordinary units. Sponsors and their associates might also be granted subordinate units under the regulations, but these units had fewer privileges than regular units. Nevertheless, with regard to their issuance, disclosures, and measures to protect the interests of unitholders, no formal norms or establishments were produced.

Under the new framework, the issuing procedure and requirements for subordinate units, which are clearly categorized as inferior to ordinary units and possess neither voting nor distribution rights, are standardized. These units may only be issued by privately held InvITs to qualifying entities in exchange for infrastructure asset purchases.

Configuration of the Amendment

The following are the main clauses of the new framework for the issue of Subordinate Units:

• Insurance of Subordinate Units:
  1. Issuance Conditions: - Only privately placed InvITs may issue subordinate units; they must be issued in dematerialized form, distinct from regular units, and with a unique ISIN following the acquisition of an infrastructure project. These units are regarded as a portion of the money paid to acquire the infrastructure project from the sponsor, its affiliates, and the sponsor group of the InvIT. Either at the initial offer or in later offers, issuance may take place.
     Unitholder consent is required for every issue subsequent to the initial offer; a resolution requiring the support of at least 1.5 times as many votes as opposed is required. Voting is not permitted for unitholders engaged in the project purchase, including the sponsor and its affiliates.
  2. Authorization and Pricing: The Subordinate Units' price must adhere to the Ordinary Units' pricing criteria. Provisions in the trust deed must authorize Subordinate Unit issuing.
  3. Limits on Issuance: No more than 10% of the project's acquisition price may be issued in Subordinate Units throughout the acquisition process. 10% of all outstanding ordinary units must always be less than the entire number of outstanding subordinate units. While InvITs may issue additional units, they must adhere to this cap if their outstanding Subordinate Units at the time of the Amendment's notification exceeded it.
  4. Terms and Conditions: Except as provided by the framework, the terms and conditions of Subordinate Units cannot be altered after they are issued. The investment manager needs to get the recognized stock exchange's in-principle approval before issuing Subordinate Units so that these can be listed once they are relisted.
  5. Restriction on Public Fundraising: InvITs that have outstanding Subordinate Units are not permitted to generate money through public offerings.
     These restrictions seek to standardize the issuing process, preserve transparency, and safeguard investor interests by restricting how to issue recipients of subordinate units and assuring strict compliance with predetermined regulations
• Subordinate Unit Transfer:
  Subordinate units are locked in until they are reclassified as ordinary units. Only the sponsor, its affiliates, or the sponsor group entities may transfer or encumber these units. If the sponsor changes, the departing sponsor may assign any Subordinate Units it owns to the sponsor group, its affiliates, or another sponsor.

• Reclassification of Subordinate Units:
  1. Title Date and Event: The term sheet must specify and provide details regarding the precise date and event that caused the reclassification of Subordinate Units to Ordinary Units.
  2. Minimum Time Period: The issuing of Subordinate Units and the date of entitlement for their reclassification to Ordinary Units must occur no later than three years.
  3. Extension of Entitlement Date: If certain requirements are satisfied, the entitlement date may be extended as stated in the term sheet.

• Performance Benchmarks
  Subordinate units are prohibited from operating until they meet precise, quantifiable performance objectives generated from InvIT's audited financial records. Meeting these predetermined standards is the only way to transform them into regular units.

• Change in Sponsor
  Subordinate units in an InvIT are limited to transfers or encumbrances between the sponsor, its affiliates, and the sponsor group; ordinary units in an InvIT are transferable at will. By imposing this restriction, the sponsor organization is guaranteed to retain control over the InvIT, preserving its governance and operational framework. In the case of a change in sponsors, all subordinate units held by the departing sponsor must be transferred to the incoming sponsor, along with any recently inducted sponsors and their colleagues inside the new sponsor group. The departing sponsor cannot transfer subordinate units to the newly self-managed investment manager in the event that the investment manager becomes self-managed instead of externally managed.

• Disclosure Requirements
  Regardless of when they were issued, InvITs must disclose completely to subordinate units in accordance with the Amendment Regulations. Term sheets ought to provide information on the legal environment and possible effects of converting these units back into regular units. All necessary paperwork, including meeting minutes and placement memos, must be sent in by InvITs to stock exchanges and posted online. It is imperative to promptly notify stock exchanges of any transfers or encumbrances of subordinate units in order to uphold regulatory compliance and transparency. InvITs are required to provide updates on their progress toward fulfilling performance goals for their subordinate units in their annual reports. InvITs are also required to provide, in addition to regular NAV and distribution numbers, diluted net asset value (NAV) and diluted distribution per Unit until subordinate units are converted.

Conclusion

The amendment constitutes a substantial regulatory change for InvITs by introducing subordinate units to handle liquidity issues and resolve value disputes in infrastructure acquisitions. These units shield current unitholders from early diluting of their investments while also enhancing transactional flexibility and efficiency. These requirements were first applied to privately placed InvITs, but SEBI may eventually extend them to InvITs that are offered publicly. As the infrastructure sector develops, these reforms are crucial for promoting fair investment practices and guaranteeing market stability.

These regulatory improvements are anticipated to impact market dynamics as infrastructure investments progress by drawing in more capital and fostering sustainable growth in infrastructure projects throughout India. Their goal is to create a transparent and reliable atmosphere that raises stakeholder and investor confidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.