I. Introduction to Infrastructure Investment Trusts

The infrastructure sector is one of the most important sectors in any developing economy. Even more so in the case of the Indian economy, where currently the real estate and infrastructure sectors together are the second largest employers after agriculture. Infrastructure has facilitated a steady inflow of private and foreign investments. Due to being a capital intensive sector and the paucity of public funds available to stimulate growth, it is imperative that additional channels of financing are put in place for continued development. As part of the several reform measures introduced to boost the economy and revitalize this sector, the Securities and Exchange Board of India (“SEBI”) introduced the SEBI (Infrastructure Investment Trusts) Regulations, 2014[1] (“InvIT Regulations”). These regulations have been in effect since September 26, 2014 and have so far successfully made fresh capital available for acash starved infrastructure sector. The introduction of the InvIT Regulations and easing of foreign direct investment and industry restrictions has led to a number of InvITs being established and registered with SEBI.

Infrastructure investment trusts (“InvITs”) enable direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return, and provide a unique investment opportunity in a long term yield instrument in the infrastructure space. The trust is established by the sponsor who typically owns the underlying infrastructure assets. The trust itself raises funds from investors by offering them units in the trust and uses the funds so raised to acquire infrastructure assets. The assets acquired are revenue generating and commit their operating cash flow to the trust which is distributed to the unit holders as a return on their investment. The trust vehicle thereby provides twin benefits, by providing faster liquidity (and the ability to go asset-light) to the sponsors which enables them to clear their existing debt obligations in an industry which is highly capital intensive and on the flip side, provides investors with an opportunity to invest in a relatively risk-free long term yield instrument. Accordingly, InvITs have become a popular vehicle amongst infrastructure players lately, especially given the tax benefits involved.

II. 2018 SEBI Guidelines for Preferential Issue of Units by InvITs

Regulation 2(1)(zo) of the InvIT Regulations defines a preferential issue as, “an issue of units by a listed InvIT to any select person or group of persons on a private placement basis and does not include an offer of units made through a public issue, rights issue, bonus issue, qualified institutions placement or any other issue as may be specified by the Board.” Regulation 14(4)(b) read with Regulation 2(1)(zo) allows for any subsequent issue of units after an initial offer as a preferential issue as long as the issue is in line with the guidelines prescribed by SEBI.

In this regard, SEBI issued the Guidelines for Preferential Issue of Units by Infrastructure Investment Trusts published by way of a circular on June 5, 2018[2] (“2018 Guidelines”). However, under the 2018 Guidelines, the preferential issue could be made only to ‘institutional investors’. Further, the nature of the 2018 Guidelines (being the process and timing) also resembled the issuance process set out for a qualified institutional placement prescribed for listed companies under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018[3] (“ICDR Regulations”). Accordingly, while the 2018 Guidelines were meant to deal with ‘preferential issues’, in effect, they restricted the scope of preferential issues under the InvIT Regulations.

This did not however stop InvITs from raising further funds by way of preferential issues. For example, India Grid Trust (“IndiGrid”), a listed InvIT, raised funds in May, 2019 by way of a preferential issue of units to institutional investors under the 2018 Guidelines to raise about INR 2,560 crore.

III. 2019 SEBI Guidelines for Preferential Issue of Units and Institutional Placement of Units by a listed InvIT

With a view to simplify fund raising methods but at the same time provide enough clarity, SEBI, vide its circular dated November 27, 2019, replaced the 2018 Guidelines with the SEBI Guidelines for Preferential Issue of Units and Institutional Placement of Units by a listed Infrastructure Investment Trust[4] (“2019 Guidelines”). The 2019 Guidelines detail two modes of fund raising by listed InvITs, namely (i) preferential issue and (ii) institutional placement.

The key features of the 2019 Guidelines in relation to preferential issues are inter alia as follows:

1. A resolution of existing unitholders is required in accordance with the InvIT Regulations. The units must be listed for a period of at least 6 months (as opposed to 12 months for institutional placement) prior to the date of issuance of notice to the unitholders for convening the meeting to pass the resolution;

2. The in-principle approval of the stock exchanges is required. Post allotment, the InvIT should make an application for listing of the units to the stock exchanges and the units shall be listed within 7 working days from the date of allotment;

3. The InvIT should be in compliance with the continuous listing and disclosure obligations;

4. None of the promoters, partners or directors of the sponsor, investment manager or trustee should be a fugitive economic offender;

5. Any offer or allotment through private placement shall not be made to more than 200 investors (excluding institutional investors) in a financial year;

6. The pricing for a preferential issue where the units of the InvIT are frequently traded should not be lower than the higher of the following; (i) the average of the weekly high and low of the volume weighted average price of the units during the 26 weeks preceding the relevant date; or (ii) the average of the weekly high and low of the volume weighted average prices of the units during the 2 weeks preceding the relevant date. The pricing for a preferential issue where the units of the InvIT are infrequently traded should take into account the net asset value of the InvIT based on a full valuation of all existing InvIT assets conducted in terms of InvIT Regulations;

7. Up to 15% of the units allotted to sponsors shall be locked-in for a period of 3 years from the date of trading approval granted for the units and any units in excess of the 15% threshold shall only be locked-in for a period of 1 year. Non-sponsor units shall be locked-in for a period of 1 year;

8. Allotment pursuant to the unit holders’ resolution shall be completed within a period of 15 days from the date of passing of such resolution.

Those familiar with the preferential allotment guidelines for listed companies under the ICDR Regulations would notice that the 2019 Guidelines attempt to bring fund raising methods for InvITs in line with those available to listed companies under the ICDR Regulations. SEBI has now removed the ambiguity around the process of preferential allotment which the 2018 Guidelines created.

The 2019 Guidelines are accordingly a welcome and much needed move from SEBI as they provide solutions to challenges of raising further funds by existing InvITs. By keeping the process in sync with the tried and tested ICDR Regulations, SEBI has ensured that there will be less ambiguity going forward and there is uniformity in relation to public market capital raising exercises.

Authors:
Atreya Bhattacharya, Partner
Pranav Atit, Senior Associate
Armaan Srinivasan, Associate

Footnotes:
[1] Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 published on September 26, 2014 [No. LAD-NRO/GN/2014-15/10/1577]
[2] Securities and Exchange Board of India: Guidelines for Preferential Issue of Units by Infrastructure Investment Trusts published on June 5, 2018 [SEBI/HO/DDHS/DDHS/CIR/P/2018/89]
[3] Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 published on September 11, 2018 [No. SEBI/LAD-NRO/GN/2018/31]
[4] Securities and Exchange Board of India: Guidelines for preferential issue of units and institutional placement of units by a listed Infrastructure Investment Trust published on November 27, 2019 [SEBI/HO/DDHS/DDHS/CIR/P/2019/143]