Understanding Infrastructure Investment Trusts

CA Shivam Goenka , Last updated: 20 February 2024
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Introduction

Infrastructure Investment Trust (commonly referred to as InvIT) has been gaining popularity among the entities engaged in the infrastructure sector, as a means to raise funds. As per the latest data available on the SEBI website, there are 23 InvITs registered with SEBI, out of which 3 are public InvITs (namely IRB Infrastructure Investment Trust, India Grid Trust and PowerGrid Infrastructure Investment Trust). SEBI had notified the InvIT Regulations 2014, on 26 September 2014. These Regulations contains the detailed framework for registration and regulation of an InvIT. In addition, SEBI has also issued multiple circulars and FAQs to supplement these Regulations.

This article aims to analyse the regulatory framework for InvITs and its salient features.

Meaning of an InvIT

InvIT is a trust registered with SEBI to carry out the activities prescribed under SEBI (InvIT) Regulations, 2014. An InvIT raises funds by issuing units to investors and invests those funds primarily in assets which fall under any of the sub-sectors included in the Harmonised Master List of Infrastructure Sub-sectors, notified by Ministry of Finance from time to time. The five broad categories in this Master list comprises of transport and logistics, energy, water and sanitation, communication and social and commercial infrastructure. An InvIT earns revenue by operating one or more of such infrastructure projects. It may also be worthwhile to mention here about Real Estate Investment Trusts (REITs). Similar to InvITs, REITs also pool money from multiple investors and invest in cash flow generating assets. The main difference is that REITs invest in real estate assets, while InvITs invest in infrastructure projects.

Understanding Infrastructure Investment Trusts

Types of InvITs

InvITs may be public or private. Public InvITs are those, which offer units in the initial offer to public (i.e. all classes of investors). Public InvITs are required to be listed on recognised stock exchanges. Investors who hold units in an InvIT are called unit holders.

InvITs which offer units in the initial offer on private placement basis to institutional investors and body corporates, are categorised as private InvITs. Private InvITs may be either listed or unlisted.

Further, there are also provisions in the InvIT Regulations for conversion of a private unlisted InvIT into a private listed InvIT and private listed InvIT into public InvIT.

Structure of InvITs

Infrastructure assets are generally developed or held by infrastructure developers through separate legal entities known as Special Purpose Vehicles (SPVs). SPVs can be set up in the form of a company or a Limited Liability Partnership (LLP). Sometimes a two-tier structure involving a holding company (HoldCo) and SPVs is also used to develop multiple projects under different SPVs.

InvITs can acquire infrastructure assets through acquiring ownership of the assets or through acquiring the holding company/SPV holding such assets.

Parties to an InvIT

The structure of an InvIT is similar to that of a mutual fund. The various parties to an InvIT includes:

Investment Manager - Responsible for the day-to-day management of InvIT and makes investment decisions with respect to the underlying assets or projects of the InvIT including any further investment or divestment of the assets. Its responsibilities include ensuring proper legal titles of InvIT assets, appointment of auditors, issue and listing of units, declaration of distributions, redressal of grievances of the unit holders, coordination and submission of various reports to the trustee, etc.
Project Manager - Responsible for the operations and management of the InvIT assets.
Sponsor - The sponsor sets up the InvIT and appoint the trustees of the InvIT. InvIT Regulations provide that the sponsor(s) should collectively hold at least 15% of the total units of the InvIT after initial offer of units, on a post-issue basis for a period of at least 3 years from the date of the listing of such units.
Trustee - The trustee holds the InvIT assets in trust for the benefit of the unit holders in accordance with the Trust Deed. The trustee oversees the activities of the Investment Manager and the Project Manager to ensure compliance to the InvIT regulations.

Registration and eligibility requirements

An entity is required to obtain a certificate of registration from SEBI for registration as an InvIT. The application is to be made by the Sponsor on behalf of the Trust in Form A as specified in Schedule I of the Regulations, which contains various sections on the required information (such as general information, business plan and investment strategy, details of various parties to the InvIT, whether any regulatory action taken in the past, other information/ declarations, etc.).

SEBI has laid down detailed eligibility requirements for registration, which ensures that the InvIT is managed professionally and by financially sound parties, who have the relevant expertise along with a minimum asset and IPO size. These requirements are discussed below:

Financial soundness of the parties – The Sponsor and the Investment Manager should have a net worth/net-tangible assets of at least Rs. 100 crores and Rs. 10 crores respectively.
Relevant expertise – The Sponsor must possess a sound track record in development of infrastructure or fund management in the infrastructure sector. The Investment Manager should have not less than five years of experience in fund management or advisory services or development in the infrastructure sector, or the combined experience of its directors/ partners/ employees in fund management or advisory services or development in the infrastructure sector is not less than 30 years, etc. The Valuer shall not be an associate of the Sponsor or Investment Manager or Trustee and shall have not less five years of experience in valuation of infrastructure assets.
Professional management - Not less than half of the directors/members of the governing board of the Investment Manager need to be independent directors.
Minimum asset base and IPO size - For making an initial offer of units, the value of the assets held by the InvIT should not be less than Rs. 500 crores and the offer size should not be less than Rs. 250 crores.

Certain other requirements to be complied by an InvIT

SEBI has incorporated various provisions in the Regulations, to ensure transparent and efficient functioning of the InvIT and to protect the interest of the unit holders. These include the following requirements:

Minimum holding period: Infrastructure asset is required to be held by the InvIT for a period of at least 3 years from the date of purchase of such asset directly or through holdco and/or SPV.
Investment in completed and revenue generating projects: If the InvIT raises funds by public issue, not less than 80% of the value of the InvIT assets shall be invested, proportionate to the holding of the InvITs, in completed and revenue generating infrastructure projects (i.e., an infrastructure project which has achieved the commercial operations date, all the requisite approvals and certifications for commencing operations; and has been generating revenue from operations for a period of not less than one year)
Valuation of InvIT assets: Mandatory annual valuation (half yearly in case of publicly listed InvITs) of all InvIT assets. Mandatory minimum disclosures in full valuation report are provided in Schedule V of the Regulations. Further, provisions to ensure independence, objectivity and competence of valuer have been laid down.
Income distribution to unitholders: Mandatory distribution of at least 90% of Net Distributable Cash Flows to the unitholders through dividends and interest pay-outs on a bi-annual basis.
Limit on borrowings: Aggregate consolidated borrowings and deferred payments of the InvIT, Holdco and the SPVs, net of cash and cash equivalents, shall never exceed 49% of the value of the InvIT assets. In cases, where this limit exceeds 25%, it is mandatory to obtain credit rating and approval of the unit holders.
Related party transactions: Detailed disclosures on related party transactions. Further, approval from unit holders is mandated for related party transactions above prescribed thresholds.
Code of conduct: Adherence to the code of conduct laid down in Schedule VI of the Regulation.
Redressal of grievances: Unitholders have a right to redressal of their grievances. Unitholders should first approach the InvIT and, in case, the complaint remains unresolved, they may approach SEBI through SEBI Complaint Redress System (SCORES).

Financial information to be disclosed in offer document/placement memorandum

The master circular for InvITs dated 26 April 2022 issued by SEBI contains guidelines on the financial information to be disclosed in the offer document/ placement memorandum. It requires disclosure of financial information for a period of last three completed financial years immediately preceding the date of offer document/ placement memorandum. Further, it states that if the closing date of the last completed financial year falls more than six months before the date of offer document/ placement
memorandum, then the InvIT shall also additionally disclose the interim financial information, and it shall not be more than six months old from the date of offer document/ placement memorandum.

The Circular states that the InvIT shall disclose the financial information for the previous three financial years and the interim period, if any, in either of the following manner depending upon the history of the InvIT:

If the InvIT has been in existence for the last three completed financial years immediately preceding the date of offer document/ placement memorandum, then the historical financial statements of the InvIT (on both standalone as well as consolidated basis) for last three years, and the interim period, if any, shall be disclosed.
If the InvIT has been in existence for a period lesser than the last three completed financial years and the historical financial statements of InvIT are not available for some portion or the entire portion of the reporting period of three years and interim period, then the combined financial statements need to be disclosed for the periods when such historical financial statements are not available.

In addition to the financial statements, there are certain additional statements/disclosures required such as project wise operating cash flows, earnings per unit, contingent liabilities, commitments, related party transactions, capitalisation statement and debt payment history.

The Circular also provides the principles to be adopted for the preparation of combined financial statements, which are as under:

Assets/entities forming part: All the assets or entities, which are proposed to be owned by the InvIT, as per the disclosures in the offer document/ placement memorandum, shall collectively form part of combined financial statements.
Underlying assumption for preparation: Such combined financial statements shall be prepared based on an assumption that all the assets and/or entities, proposed to be owned by InvIT, were part of a single group for such period when InvIT was not in existence.
Basis of preparation: These statements shall be prepared on a combined basis and presented as if InvIT assets were a part of a single group since the first day of the reporting period for which information is being presented. The principles for preparation of combined financial statements shall be same as the principles laid down in "Ind AS 110 Consolidated Financial Statements", to the extent applicable. However, unlike consolidated financial statements, the combined financial statements shall not have the parent. Assumptions made in preparation of the Combined Financial Statements shall be disclosed in 'Basis of Preparation' of such statements. The basis of preparation shall also explain the principles of combination and elimination of transactions amongst entities that are included in the Combined Financial Statements.
Other guidance to be followed: In addition, the InvIT/Investment Manager, while preparing the Combined Financial Statements of the InvIT, shall also be guided by the requirements laid down in the 'Guidance Note on Combined and Carve-Out Financial Statements' and any other pertinent guidance/directions issued by ICAI in this context.

Benefits of InvITs for investors and infrastructure companies

As an investment option for investors, InvITs enable investors to participate in the various diversified infrastructure assets and earn regular income through interests and dividend payout. However, there may also be risks related to unpredictability of cash flows due to natural calamities, tariff or a policy change by the Government, etc.

For infrastructure companies, they are able to raise money without incurring debt and to use this money for their business growth. In addition, since InvIT is registered as a Trust, various tax benefits, as available to a Trust, can be availed.

Conclusion

The main objective of the InvITs is to facilitate investment in the infrastructure sector in India for overall economic growth. To achieve this objective, SEBI has built in sufficient guardrails for the protection of interests of the unitholders, as discussed above. The InvITs are expected to play a significant role going forward, due to the increasing needs of alternative financing channels to meet the investment needs in infrastructure.

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