SECURITIES EXCHANGE BOARD OF INDIA (INFRASTRUCTURE INVESTMENT TRUSTS) REGULATIONS, 2014 – AN OVERVIEW – PART II

[Mr. M. GOVINDARAJAN]

In this part the provisions relating to offer of units of InvIT and listing of units, investment conditions, related party transactions, borrowing and valuation of assets.

An InvIT can place initial office only if it is registered with the Board under these regulations.   The value of assets to be held is not less than ₹ 500 crores.  The offer size should not be less than ₹ 250 crores.  The InvIT may invest in under-construction projects and completed and revenue generating infrastructure projects.

Investment in under-construction projects

If the InvIT proposes to or invests in under-construction projects, value of which is more than 10% of the value of the assets of InvIT, it shall raised funds-

• By way of private placement only through a placement memorandum;
• From qualified institutional buyers and body corporate only, whether Indian or foreign;
• With minimum investment from any investor of ₹ 1 crore;
• From not less than 5 and not more than 1000 investors.

The InvIT shall file the draft placement memorandum for making private placement of units with the Board along with the application for registration.   The Board may communicate its comments to the applicant which shall be incorporated in placement memorandum prior to grant of registration.

Completed and revenue generating projects

With respect to InvIT that holds not less than 80% of its assets in completed and revenue generating infrastructure projects-

• Initial issue of units shall be through initial offer only;
• After this units may be issued by preferential allotments, qualified institutional placement, rights issue, bonus issue, offer for sale or any other mechanism and in the manner as may be specified by the Board;
• Minimum subscription for any type of offer is ₹ 10 lakhs;
• The units to be offered to the public shall not be less than 25% of the total of the outstanding units and the units are to be offer by way of the offer document;
• The investment manager shall file the draft offer document with the stock exchange and SEBI not less than 21 working days before filing the final offer document;
• The offer document shall be made public by hosting the same in the web site of the Board, stock exchanges and merchant bankers for the public comments;
• The Board may communicate the comments received from the public to the lead manager;
• The Board may require the lead Merchant Banker to carry out such modifications in the draft offer documents as it deems fit;
• The same should be addressed by the lead merchant banker prior to filing of the final offer document with the stock exchanges;
• If no modification is sought by the Board in the draft offer document within 21 days from the date of receipt of reply from the lead merchant banker or manager, the InvIT may issue the final offer document or follow on offer document to the public;
• The draft and final offer document shall be accompanied by a due diligence certificate signed by the investment manager and lead merchant banker;
• The final offer document shall be filed with the designated stock exchange and SEBI not less than 5 working days before opening of the offer along with fee;
• The InvIT may make the offer within a period of not more than 6 months from the date of issuance of observation by the Board, if any;
• If no observation has been issued by the Board the offer may be made within 6 months from the date of filing of final offer documents with the designated stock exchange;
• If offer is not made within the prescribed period, a fresh offer document shall be filed;
• The InvIT may invite for subscriptions and allot units to any person whether resident or foreign;
• The application for subscription shall be accompanied by a statement containing the abridged version of the offer document detailing the risk factors and summary of the terms of the issue;
• The offer shall not be open for a period of more than 30 days;
• In case of over subscription units shall be allotted on a proportionate basis rounded off to the nearest integer subject to a minimum subscription amount Re. 1 crore per  subscriber;
• The units shall be allotted or refunded within 12 working days from the date of closing of the issue;
• The units shall be issued only in dematerialized form;
• The price of the units shall be determined through the book building process or any other process in accordance with the guidelines issued by the Board and in the manner as specified by the Board;
• The InvIT shall refund money-

• To all the applicants if it fails to collect subscription of at least 75% of the issue size as specified in the final offer document;
• To the applicants to the extent of over subscription;
• To all the applicants, in case the number of subscribers is less than 20;

• If the investment manager fails to allot or list the units or refund the money within the specified time, then he shall pay interest to the unit holders @ 15% per annum till such allotment or listing or refund and such interest shall not be recovered in the form of fees or any other form payable to the investment manager by the InvIT;
• Units may be offered for sale to public-

• If the units have been held by the sellers for a period of at least one year prior to the filing of draft offer document with the Board;
• Subject to other guidelines as may be specified by the Board in this regard.

Offer document or placement memorandum and advertisement

• The offer document or placement memorandum shall contain material, true, correct and adequate disclosures to enable the investors to make an informed decision;
• The same shall-

• Not be misleading or contain any untrue statements or mis-statements;
• Not provide for any guaranteed returns to the investors; and
• Include such other disclosures as may be specified by the Board.

• The placement memorandum shall contain all material information about the InvIT-

• Parties to the InvIT;
• Fees and all other expenses proposed to be charged;
• Tenure of the InvIT;
• Investment strategy;
• Risk management tools and parameters employed;
• Key service providers;
• Conflict of interest and procedures to identify and address them;
• Disciplinary history of the sponsor(s), investment manager, trustee and their associates;
• The terms and conditions on which the investment manager offers investment services, its affiliations with other intermediaries;
• Manner of winding up of the InvIT; and
• Such other information as may be necessary.

• No advertisement shall be issued in respect of private placement;
• In respect of public offer-

• The advertisement shall not be misleading and shall not contain anything extraneous to the contents of the offer document;
• If an advertisement contains positive highlights, it shall also contain risk factors with equal importance in all aspects including print size;
• The advertisement shall be in accordance with any circulars or guidelines as may be specified by the Board.

Listing and trading of units

• It is compulsory to list the units on a recognized stock exchange having nationwide trading terminals, whether publicly issued or privately issued;
• the listing shall be in accordance with the listing agreement entered into between the InvIT and the stock exchanges;
• the units shall be traded, cleared and settled in accordance with the bye laws of the stock exchange and such conditions as may be specified by the Board;
• the units shall be redeemed only by way of a buyback or at the time of delisting of the units;
• the units shall remain listed unless delisted;
• the minimum public offer after listing shall be 25% of total number of outstanding units; failing which action may be taken by the SEBI and stock exchanges including delisting of the units;
• the minimum number of unit holders other than the sponsor(s)-

• in case of privately placed shall be 5, each holding not more than 25% of the units;
• forming part of the public shall be 20, each holding not more than 25% of the units at all times post listing of the units, failing which action may be taken by SEBI and the stock exchanges including delisting of units;

• the units shall be listed in case of privately placed units on the stock exchanges within 30 working days from the date of final closing; the trading lot for trading shall be ₹ 1 crore;
• the units shall be listed in case of publicly placed units on the stock exchanges within 12 working days from the date of closure of the initial offer; the trading lot for trading shall be ₹ 5 lakhs;
• any person other than the sponsor(s) holding units prior to initial offer should hold the units for a period of not less than one year from the date of listing of the units;

Delisting of units

• The investment manager shall apply for delisting of the units if-

• The public holding falls below the specified limit;
•  The number of unit holders falls below the limit as specified;
• If there are no projects or assets remaining for a period of exceeding 6 months and the InvIT does not propose to invest in any project in future; this period of 6 months may be extended by further 6 months with the approval of unit holders;
• The Board or the stock exchange require delisting for violation of the listing agreement or these regulations or the SEBI Act;
• The unit holders approve for delisting;

• The authorities may consider such application for delisting for approval or rejection in the interest of the unit holders;
• After delisting the InvIT shall surrender its certificate of registration to the Board and shall no longer undertake activity of InvIT;
• The InvIT and parties to the InvIT shall continue to be liable for all their acts of commission and omission notwithstanding surrender of certificate of registration.

Investment conditions

• The investment by an InvIT shall only be in SPVs or infrastructure projects or securities in India in accordance with the regulations and the investment strategy in offer document or placement memorandum;
• In case of PPP projects the investment shall be done through SPV; the InvIT shall invest only in eligible infrastructure projects or securities of companies or partnership interests of LLP in infrastructure sector;
• The investment through SPV is subject to the following conditions:

• no other shareholder or partner of the SPV shall have any right that prevents the InvIT from complying with the provisions of these regulations and an agreement shall be entered into with such shareholders or partners to that effect prior to investment in SPV;
• if SPV is a company, the investment manager, in consultation with the trustee, shall appoint not less than one authorized representative on the Board of Directors or governing Board of such SPVs;
• the investment manager shall ensure that in every meeting including AGM of the SPV, the voting of the InvIT is exercised;

1. not less than 80% of the value of the assets shall be invested proportionate to the holding, in completed and revenue generating infrastructure projects subject to the following:

• if the investment has been made through  a SPV, whether by equity or debt or equity linked instruments or partnership interest, only the portion of direct investments in eligible infrastructure projects by such SPVs shall be considered and the remaining portion shall be included under clause (b);
• if any project is implemented in stages, the part of the project which can be categorized as completed and revenue generating project shall be considered and the remaining shall be included under clause (b);

2. not more than 20% of the value of the assets, proportionate to the holding of the InvITs shall be invested to-

• under-construction infrastructure projects, whether directly or through SPVs;
• listed or unlisted debt of companies or body corporate in infrastructure sector;
• equity shares of companies listed on a recognized stock exchange in India which derive not less than 80% of their operating income from infrastructure sector as per the audited accounts of the previous financial year;
• government securities;
• money market instruments, liquid manual funds or cash equivalent;

(c) if the conditions specified clause (a) and (b) are breached on account of market movements of the price of the underlying assets or securities the investment manager shall inform the same to the trustee and ensure that the conditions specified are satisfied within 6 months of such breach; this period may be extended to one year subject to the approval of the investors;

• An InvIT shall not invest in units of other InvITs;
• An InvIT shall not undertake lending to any person;
• An InvIT shall hold an infrastructure asset for a period of not less than 3 years from the date of purchase of such asset by the InvIT, directly or through SPV;
• In case any co-investment with any person in any transaction-

• The investment by the other person shall not be at terms more favorable than those to the InvIT;
• The investment shall not provide any right to the person which shall prevent the InvIT from complying with the provisions of these regulations;
• The agreement with such person shall include the minimum percentage of distributable cash flows that will be distributed and entitlement of the InvIT to receive not less than pro rata distributions and mode for resolution of any disputes between the InvIT and the other person.

Dividend policy
                        With respect to the distributions made by the InvIT and the SPV-

• Not less than 90% of net distributable cash flows of the SPVs shall be distributed to the InvIT in proportion of its holding in the SPV subject to applicable provisions in Companies Act, 2013 or LLP Act, 2008;
• Not less than 90% of the net distributable cash flows of the InvIT shall be distributed to the unit holders;
• Such distributions shall be declared and made not less than once every six months in every financial year in case of publicity offered InvITs and not less than once every year in case of privately placed InvITs and shall be made not later than 15 days from the date of such declaration;
• The distribution shall be as per the dates and in the manner as mentioned in the offer document or placement memorandum;

If any infrastructure asset is sold by the InvIT or SPV or if the equity shares or interest in the SPV are sold by the InvIT-

• If the InvIT or SPV proposes to re-invest the sale proceeds into another infrastructure asset, it shall not be required to distribute any sales proceeds to the InvIT or to the investors;
• If not proposed to reinvest the same shall be distributed as mentioned in the first para.

If the distributions are not made within 15 days of declaration, then the investment manager shall be liable to pay interest to the unit holders at the rate of 15% per annum till the distribution is made and such interest shall b recovered in the form of fees or any other form payable to the investment manager by the InvIT.

Related Party transactions

All related party transactions shall be on an arm-length basis in according to the accounting standards, in the best interest of the unit holders, consistent with the strategy and investment objectives of the InvIT.  Such transactions shall be disclosed-

• In the offer document or placement memorandum entered into prior to the offer of units and  any proposed  transactions subsequent to the offer;
• to the designated stock exchanges and unit holders periodically in accordance with listing agreement and provisions of these regulations.

With respect to publicly offered InvITs entered into after initial offer if-

• the total value of all the related party transactions, in a financial year, in acquisition or sale of assets or investments into securities exceeds 5% of the value of InvIT; or
• the value of the funds borrowed from related parties, in a financial year, exceeds 5% of the consolidated borrowings of the InvIT approval from the unit holders shall be obtained prior to entering into any such arrangement transaction with any related party;

The transaction between two or more of the InvITs with a common investment manager or sponsor shall be deemed to be related party transactions.  The details of any fees or commission received by any person or entity which is an associate of the related party shall be disclosed to the stock exchanges.

Where any of the related parties have an interest in a business which competes or is likely to compete, either directly or indirectly, with the activities of the InvIT, the following details shall be disclosed in the offer document or placement memorandum-

• details of such business including an explanation as to how such business shall compete with the InvIT;
• a declaration that the related party shall perform its duty in relation to the InvIT independent of its related business;
• declaration as to whether any acquisition of such business by the InvIT is intended and if so, details of the same thereof.

not

Borrowings and deferred payments

The aggregate consolidated borrowings and deferred payments of the InvIT net of cash and cash equivalents shall never exceed 49% of the value of the assets.  If the aggregate consolidated borrowings and deferred payments of the InvIT net of cash and cash equivalents exceed 25% of the value of the assets, for any further borrowing-

• credit rating shall be obtained from a credit rating agency registered with the Board; and
• approval of unit holders shall be obtained in the manner specified;

If the above conditions are breached on account of market movements of the price of the underlying assets of securities, the investment manager shall inform the same to the trustee and ensure that the conditions are satisfied within 6 months of such breach.

Valuation of assets

For the purpose of valuation of assets, the valuer shall not be an associate of the sponsor(s) or investment manager or trustee and shall have not less than 5 years of experience in valuation of infrastructure assets.  The valuation includes physical inspection of every infrastructure project.  The valuation report shall include the mandatory minimum disclosures.   It shall be conducted by the valuer not less than once in every financial year.  Such valuation shall be conducted at the end of the financial year ending March 31^st within 2 months from the date of end of such year.

A half yearly valuation shall be conducted for the half year ending September 30^th for a publicly offered InvIT for incorporating any key changes in the previous 6 months and such half yearly valuation report shall be prepared within one month from the date of end of such half year.  The valuation report received by the investment manager shall be submitted to the stock exchanges within 15 days from the date of receipt of such reports.

Prior to any issue of units by publicly offered InvIT other than bonus issue, the valuer shall undertake full valuation of all the assets and include the same in the offer document.  Such valuation report shall not be more than six months old at the time of such offer.

For any transaction of purchase or sale of infrastructure projects, whether directly or through SPVs for publicly offered InvITs-

• a full valuation of the specific project shall be undertaken by the valuer;
• if-

• in case of a purchase transaction, the asset is proposed to be purchased at a value greater than 110% of the value of the asset as assessed by the valuer;
• in case of a sale transaction, the asset is proposed to be sold at a value less than 90% of the value of the asset as assessed by the valuer

approval of the unit holders shall be obtained.

No valuer shall undertake valuation of the same project for more than four years consecutively.   The valuer may be reappointed after a period of not less than 2 years from the date it ceases to be the valuer.

The valuation undertaken by the valuer shall be in compliance with the international valuation standards and valuation standards as may be specified by the Institute of Chartered Accountants of India for valuation of infrastructure assets or such other valuation standards as may be specified by the Board.

In case of any material development which may have an impact on the valuation of the assets, then the investment manager of a publicly offered InvIT shall require the valuer to undertake the full valuation of the project under consideration within not more than 2 months from the date of such event and disclose the same to the trustee and the stock exchanges within 15 days of such valuation.

The valuer shall not undertake valuation of any assets in which it has either been involved with the acquisition or disposal within the last 12 months other than such cases where the valuer was engaged by the InvIT for such acquisition or disposal.

Disclosures

The investment manager shall submit an annual report to all unit holders electronically or by physical copies and to the stock exchanges within 3 months from the end of the financial year.  He is also to submit a half yearly report to the stock exchange within 45 days from the end of every half year ending 31^st March and 30^th September.

The investment manager shall disclose to the stock exchange any information having bearing on the operation or performance of the InvIT as well as price sensitive information which includes but it is not restricted to the following:

• acquisition or disposal of any projects, directly or through SPV, value of which exceeds 5% of value of the InvIT assets;
• additional borrowing at level of SPV or the InvIT, exceeding 15% of the value of the assets;
• additional issue of units;
• details of any credit rating obtained and any change in such rating;
• any issue which requires approval of the unit-holders;
• any legal proceedings which may have significant bearing on the functioning of the InvIT;
• notices and results of meetings of unit-holders;
• any instance of non compliance with these regulations including any breach of limits specified;
• any material issue that in the opinion of the investment manager or trustee needs to be disclosed to the unit-holders.

It is also to submit information to the stock exchanges and unit-holders on a periodical basis as required under the listing agreement.  The InvIT shall also provide disclosures or reports specific to sector or sub-sector in which the InvIT has invested or proposes to invest in the manner as may be specified by the Board.