SEBI proposes easing of InvITs norms

With a view to attract more business house to set up Infrastructure Investment Trusts (InvITs), the Securities and Exchange Board of India (SEBI) has issued another consultation paper proposing amendments to the SEBI (InvITs) Regulations, 2014..The latest consultation paper discusses certain new issues in addition to ones already discussed in the paper which was circulated in August 2015 for public comments. This paper comes as a result of the lack of attention drawn by InvITs as only four application have been received by SEBI so far..The paper proposes the following:.1. Two level Special Purpose Vehicles (SPV).Currently, an SPV is, inter alia, defined as a company or an LLP which holds not less than 90% of its assets directly in infrastructure projects and does NOT invest in other SPVs..As suggested earlier, representations were made to allow a ‘holding SPV’ (HoldCo) to hold shares in the SPV which invests in infrastructure assets (underlying SPV)..The reasons for this, inter alia, being the time consuming process involved for change in control of the underlying SPV, pledging of the underlying SPV’s shares in favour of lenders and, other tax inefficiencies..Thus, as stated earlier, it is proposed to amend the Regulations to include a two level SPV structure subject to conditions which ensure that the underlying SPV and HoldCo work in harmony..This is being seen as a move which will bring in more flexibility, allowing investors to take up different projects under the HoldCo..However, based on the representations made following the 2015 paper, it has been pointed out that changing the existing regulations may create difficulties owing to the complications involved in a multi layered structure..Among others, difficulty involved in identification of ultimate beneficiary in the event of project failure, increase in governance and compliance risks which requires greater oversight..Thus, the other option proposes that the Regulations remain unchanged as far as SPV structure goes..2. Mandatory sponsor holding in InvIT.Sponsors are, as of now, required to hold a minimum of 25% of the total units on a post-issue basis for at least 3 years from the date of listing. This is being viewed as restrictive for the sponsors as this will limit the monetisation for sponsors, further limiting fresh infusion of capital into new projects..It is proposes that the sponsor holding be brought down to 10% instead of the existing 25 % subject to various conditions.OR.The Sponsor may divest upto of 85% with the condition that the sponsor has to retain a minimum of 15% of the units of InvIT on post issue basis for years 2 & 3. .The idea behind both these options to free-up sponsor capital for new projects..3. Increase number of sponsors from 3 to 5.It has also been pointed out that capping the number of sponsors to three may prove restrictive since various group companies of sponsors are stakeholders in the SPVs executing the project..Thus, it is proposed that, in the event holding of sponsors is not being brought down to 10% or divested upto 85%, the number of sponsors be increased to five..However, if the sponsor holding is being relaxed, number of sponsors may be retained at three..4. Approval of related party transactions by the unit holders.The current requirement for passing related party transactions and change in investment manager etc. stands at 60% and 75% investor approval respectively. This is being viewed as unfeasible considering that the related parties have to abstain from voting..The paper suggests aligning the Regulation with Companies Act, 2013 to the extent possible. This would call for 51% and 60% investor approval for related party transactions and change in investment manager etc. respectively.5. Aligning minimum public holding requirements with SCRR.Currently, a minimum public holding of 25% of the total number of outstanding units is required post issue, failing which action may be taken against the Board and designated stock exchanges including delisting of units..It has been pointed out that considering the high values involved in InvITs, 25% may not be plausible given the scant risk appetite for a new product..It is therefore recommended to align the minimum public holding requirements for InvITs with the Securities Contract (Regulation) Rules, 1957 (SCRR)..Thus, requirements provided under Rules 19(2)(b) and 19A of the SCRR should apply for public issue of InvITs. As a result, for a post issue value of greater than Rs. 4,000 crores, only 10% public shareholding will be required..6. Eligibility Criteria for Investment Manager.The Investment Manager is required to have a minimum of 5 years of experience in fund management or advisory services. It has been represented that since a investment manager needs to be incorporated, meeting the 5 year criteria will be difficult..It is, however, proposed that the sponsors of the Investment Manager should have 5 years experience in the fund management or advisory services or development in infrastructure sector..7. Responsibilities of the Trustee and its associate .Currently, the trustee and its associates will be considered as ‘related parties’ and are not allowed to invest in units of the InvIT..It has been represented that trustees are independent of any pecuniary interest in the fund and as such, should not be subjected to the same disclosures as other related parties..Therefore, associates of Trustees should be allowed to invest in the units of InvITs..9. Operational aspects.Project Management Agreement may be required to be filed only at the time of filing of offer document since assets at the time of registration may change at the time of filing of offer document..Clarify that the liability of the unit-holder is limited to the amount of his investment in the units of InvITs.