SEBI issues Consultation Paper for Amendments to Infrastructure Investment Trusts Regulations, 2014

SEBI InvIT Regulations were notified on 26th September, 2014, thereby providing a regulatory framework for registration and regulation of InvITs in India . The Regulations, inter alia, provide for conditions for making a public offer and private placement, initial and continuous disclosures, investment conditions, unit-holder approval requirements, related party disclosures, etc. Government of India, in the Budget for FY 2014-15 introduced a separate chapter on the Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) (collectively referred in the budget as "Business Trusts") in the Income Tax Act, 1961, thereby introducing various measures for Business trusts in the tax law. Further, in the Budget for FY 2015-16, government provided clarity on certain other tax aspects such as clarity on capital gains, MAT, etc. for Business Trusts. SEBI, in its discussions with the industry and in various representations, has received suggestions for making amendments/providing clarifications with respect to the InvIT Regulations. Based on the suggestions, certain amendments/clarifications are proposed to the InvIT Regulations as under: It is proposed to allow InvIT to invest in a Holdco, investing in other SPV(s) (“Underlying SPV”) subject to the following ·         the InvIT shall hold controlling interest and not less than fifty per cent of the equity share capital or interest in the HoldCo and the Holdco shall in turn hold controlling interest and not less than fifty per cent of the equity share capital or interest in Underlying SPV(s); ·         No other shareholder or partner of the Underlying SPV(s) shall have any rights that prevent the InvIT and Holdco from complying with the provisions of these regulations; ·         The investment manager, in consultation with the trustee, shall ensure that not less than one authorized representative of the HoldCo or the InvIT is appointed on the Board of directors or governing board of the Underlying SPV(s); ·         The investment manager shall ensure that in every meeting including annual general meeting of the Underlying SPV(s), the voting of the HoldCo is exercised. ·         All corporate governance norms shall be applicable at the Underlying SPV level in addition to the HoldCo. ·         All responsibilities of the investment manager with respect to the SPVs shall apply at both the levels ·         All investment conditions and leverage requirements will apply at a consolidated level. ·         The requirement of mandatory distribution of at least 90% of the distributable cash flows shall apply to the Underlying SPV(s).100% of the net distributable cash flows of the HoldCo shall be distributed to the InvIT. ·         All financial statements of the InvIT shall be consolidated with both the SPVs ·         The Holdco shall not be engaged in any other activity other than holding of the Underlying SPV(s) ·         Any other conditions as the Board may deem necessary. The present guidelines requires the sponsor(s) of the InvIT to hold, on a collective basis, not less than twenty five per cent of the total units of the InvIT on a post-issue basis for a period of not less than 3 years from the date of the listing of such units. In this regard, industry has represented following: ·         Infrastructure assets are usually financed through debt, where the capital structure of the SPVs, executing such infrastructure projects, is generally debt heavy (as high as 75-80% of the total capital employed is debt) and the value of sponsors stake in the total capital structure in such SPVs (value of equity) is in minority value. ·         High leverage at the Asset level leads to substantial cash flows being utilized towards servicing of the existing project finance debt. Since, InvITs are considered to be investment vehicles which provide stable cash flows to the investors, a capital structure with no or low leverage would ensure that interest which would have otherwise been paid to lenders is available for payment of yield to investors. ·         Therefore, for such cash flows to be made available to the investors at InvIT level a significant portion of the existing debt at the Assets has to be retired. Therefore, in a scenario where a substantial portion of the existing debt at the Assets is replaced through primary issuance at InvIT, the value of the InvIT units on a post-issue basis would reflect a value equivalent to the sum of the market value of the equity capital of the Assets and the retired debt at the assets ·         Thus, the requirement for Sponsor to hold 25% of units at InvIT on a postissue basis, may limit the monetization for sponsors and reduce release of capital for such sponsors and may not be lucrative for the existing set of sponsors. Further, in certain circumstances this may lead to sponsor putting money, out of its own pocket, in the InvIT so as to maintain the required 25% stake. This would be very onerous at the part of the sponsor. ·         Thus, the minimum sponsor holding in the InvIT may be reduced to 10% so as to make it attractive for the sponsors to float such vehicles The detailed consultation paper has been attached for your kind perusal. SEBI has invited comments and views from public on Consultation Paper. In order to take into consideration views of various stakeholders, public comments are solicited on issues by SEBI such as Allowing InvITs to invest in two level SPV structure and Relaxing the sponsor commitment in InvIT from 25% to 10%. You may kindly send your suggestions (if any) at surbhi@phdcci.in/ sunitag@phdcci.in latest by 28th August 2015.