Securities and Exchange Board of India (SEBI) in a consultation paper dated October 30, 2024 (Consultation Paper), proposes introduction of regulatory framework for restricted return infrastructure investment trusts (InvITs). Under this framework, return on investment of the investors will be restricted in one of the following ways:

 

  • downside protection on returns (floor on returns), where the investor is to be paid a fixed return as a percentage of investment, even if sufficient returns are not generated by the InvIT. Any deficit in return when compared to the floor, is to be funded by the sponsors or sponsor groups or pre-disclosed counterparties;

 

  • upside restrictions on returns (cap on returns), where the return to the investor is capped at a certain percentage of the investment, even if sufficient returns are generated by the InvIT. Any surplus return is to be distributed to the sponsors or sponsor groups or pre-disclosed counterparties; or

 

  • both downside protection and upside restriction on returns, where the return is a combination of both, floor and cap on return.

 

Any such protection or restrictions on return should be based on pre-defined upfront agreements with sponsors or sponsor group entities or pre-disclosed counterparties only.

 

However, SEBI proposes to restrict investments in InvITs with restricted returns only to sophisticated investors capable of understanding the impact of such protection / restriction. Accordingly, restricted return InvITs will be permitted only if:

 

  • InvIT is a privately placed InvIT;
  • the value of assets is a minimum of Rs. 50,000 crores; and
  • minimum investment lot and minimum trading lot is Rs. 500 crores, i.e, face value of each unit should be a minimum Rs. 500 crores.

 

A waiver cum undertaking form is proposed to be signed by the investor before investing in restricted return InvITs which includes confirming that investor has independent ability to conduct due diligence and monitor compliance with the placement memorandum of the restricted return InvIT. Investor has also completely understood that investment has upward restriction, where any surplus would be distributed and has downward restriction, where if sponsor/sponsor group entities / pre-disclosed counterparties are unable to fund the deficit, InvIT may not be in a position to ensure the minimum return to unitholders. The Bharat InvIT Association will specify a format for the waiver cum undertaking form in consultation with SEBI to ensure uniformity.

 

The Consultation Paper has also proposed the manner of collecting the forms for both primary and secondary markets. The form shall be collected by the market intermediaries including merchant banker for investors subscribing to the units of restricted return InvITs in the primary market. In the case of the secondary market, the same shall be collected by the stockbroker. In the case of units acquired in off market transfer, the form shall be collected by the depository/depository participants. The Consultation Paper also specifies the timeline within which the forms are to be collected.

 

Additionally, certain other additional investor protections have been proposed for returns with downside protection, inter alia,  period evaluation of the assets of InvITs, credit rating by credit rating agencies (CRAs) on sponsor / sponsor group entities/ pre-disclosed counter parties to ascertain their ability to meet the deficit. CRAs to ensure that only those InvITs with credible guarantees of performance / returns are approved. This credit rating report shall form part of placement memorandum. For restricted return InvITs with upper restrictions, the placement memorandum shall have a prominent disclosure on the capping of returns.

 

Conclusion:

 

The proposed framework aims to facilitate the growth of innovative investment products in India by borrowing from other jurisdictions, as well as attract risk-averse investors by offering assured returns and safeguarding investor interests.

Authors & Contributors

Partner(s):

Dhruv Chatterjee

 

 

Associate:

Prachi Yadav
Ridima Gupta