In order to enhance transparency and investor protection in the Infrastructure Investment Trusts (InvITs) space, the Securities and Exchange Board of India (SEBI) notified the Securities and Exchange Board of India (Infrastructure Investment Trusts) (Amendment) Regulations, 2024 (Amendment Regulations) on May 27, 2024.
The Amendment Regulations introduce several key changes including inter-alia introducing the concept of subordinate units, exclusion of such units from the calculation of outstanding units and minimum unitholding requirements, insertion of a new chapter IVA prescribing a framework for issuance, transfer along with transfer restrictions, reclassification criteria and procedure and enhanced disclosure requirements including reporting on subordinate units’ terms and unitholding patterns separately for subordinate and ordinary units to the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations).
Key highlights of the Amendment Regulations include:
Introduction of ‘subordinate units’
- The term ‘subordinate unit’ has been defined to mean an instrument issued by an InvIT which can be reclassified as an ordinary unit.
- Subordinate units are to be issued only by way of private placement by InvITs specifically to the sponsor, its associates, and the sponsor group on acquisition of infrastructure projects and are deemed to be a part of the consideration for acquisition of the infrastructure project received from such sponsor, its associates, and the sponsor group. Unlike ordinary units, subordinate units do not carry voting rights or distribution rights until they are reclassified as ordinary units.
- These units are neither considered for reckoning the total outstanding units of the InvIT for the purposes of determining the minimum unitholding requirement of the sponsor(s) and sponsor group(s) nor eligible for meeting such minimum unitholding requirements.
Procedure for issuance of subordinate units
- Subordinate units are required to be issued in dematerialized with International Securities Identification Numbers (ISINs) distinct from that of ordinary units.
- These units are issued by way of an initial offer or any offer after the initial offer, either along with the issue of ordinary units or without the issue of ordinary units. All issuances of subordinate units after the initial offer require unitholder approval. Unitholders including sponsors, associates of sponsors who are party to the acquisition of the infrastructure project are not entitled to vote for approval of further issuances as stipulated above.
- Provisions authorizing issuance of subordinate units are to be incorporated in the trust deed.
- The Amendment Regulations prescribe limits for issuance of subordinate whereby the total amount of subordinate units issued is limited to 10% (ten percent) of the acquisition price of the infrastructure project and cannot at any point of time exceed 10% (ten percent) of the total number of outstanding ordinary units issued by the InvIT. Exceptions may be made for InvITs with pre-existing subordinate units, subject to compliance with prescribed limits.
- The pricing of subordinate units is required to be in accordance with the pricing guidelines applicable to ordinary units and InvITs are barred from raising funds by way of public issue till such time subordinate units remain outstanding.
Transferability of subordinate units
- The Amendment Regulations stipulate lock-in requirements for subordinate units until their reclassification into ordinary units. Furthermore, transferability of these units is restricted to a great extent considering they can be transferred to and encumbered only in favour of the sponsor, its associates, or entities within the sponsor group. Transfers and encumbrances of subordinate units cannot be registered unless the recipient is any of the permitted individuals and entities as mentioned above.
- All inter-se transfers and encumbrances of subordinate units are required to be disclosed to recognized stock exchanges within one working day by the investment manager.
- As and when there is change in the sponsor of the InvIT, the outgoing sponsor is obligated to surrender any subordinate units held by it to another sponsor, its associates, or entities within another sponsor group.
Reclassification of subordinate units
- Unlike ordinary units, subordinate units require reclassification before their listing and trading on stock exchanges.
- A minimum period of 3 (three) years has to be maintained between the issuance of subordinate units and the entitlement date for reclassification of subordinate units into ordinary units.
- The entitlement date may be extended on fulfillment of certain specific conditions, with the approval of unitholders.
- The performance benchmark for reclassification of subordinate units is required to be quantifiable, objective and based on the audited financial statements which shall be monitored periodically by the investment manager.
- In the event the performance benchmark is met by the entitlement date, subordinate units will be reclassified into equal number of ordinary units on a pari-passubasis accordance with the provisions of the term sheet (subject to fulfilment of other conditions in the amendments).
- However, if the performance benchmark is not fulfilled, then the subordinate units shall be extinguished at the end of the entitlement date without any amount being paid to the holders of such units.
Intimation and listing of re-classified subordinate units
- Post trustee’s approval for reclassification or extinguishment of subordinate units, as the case may be, the investment manager is required to notify the concerned recognized stock exchange, depositories, and the registrar and transfer agent.
- The intimation must include the record date that is, the date with effect from when subordinate units will be reclassified as ordinary units. Such record date should be disclosed at least 2 (two) working days prior to the record date, excluding the date of intimation and the record date itself.
- Subordinate units once reclassified into ordinary units will be listed on the recognized stock exchange(s) upon receiving final listing and trading approval from these exchanges.
Reporting and disclosure requirements
- The Amendment Regulations mandate disclosure of terms and conditions of issuance of subordinate units, including details such as the date and event of and performance benchmark for reclassification and impact of potential reclassification in a term sheet provided by the investment manager. This term sheet is required to be disclosed in placement memorandums and notices for unitholders’ meetings to ensure transparency.
- The investment manager is required to ensure reporting of the progress in respect of achievement of the performance benchmark for reclassification of subordinate units annually. Further, the investment manager is required to disclose the diluted Net Asset Value (NAV) and the diluted distribution per unit to the concerned stock exchange along with NAV and distribution per unit until subordinate units are outstanding. Disclosure of all transfers and encumbrances of subordinate units to the concerned stock exchange within 1 (one) working day is also mandated in terms of the Amendment Regulations.
Nomination of nominee directors by unitholders in InvITs
Unitholders holding not less than 10% (ten per cent) of the total outstanding units of an InvIT, either individually or collectively, shall nominate 1 (one) director on the investment manager’s board who shall comply with the (i) requirement of recusal from voting on specific transactions as prescribed under the regulations to ensure impartiality and (ii) stewardship code outlined in Schedule VIII of the InvIT Regulations.
Conclusion
The Amendment Regulations provide flexibility to InvITs to raise financing for infrastructure projects through issuance of subordinate units and do not permit their re-classification as ordinary units unless various conditions are met. Greater accountability from the investment manager may be forthcoming given that investors (holding more than 10% (ten percent) of the outstanding units) can appoint a director on the board of directors of the investment manager.