SEBI Introduces Framework for Issuance of Subordinate Units by InvITs

SEBI Enhances InvIT Regulations to Allow Subordinate Units

The Securities and Exchange Board of India (SEBI) has introduced amendments to the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014. These amendments, now formalized in the Securities and Exchange Board of India (Infrastructure Investment Trusts) (Amendment) Regulations, 2024, permit privately placed Infrastructure Investment Trusts (InvITs) to issue subordinate units. This regulatory adjustment, enacted under the powers granted by Section 30 in conjunction with Sections 11 and 12 of the SEBI Act, 1992, aims to improve financial structuring flexibility and valuation accuracy within the infrastructure financing space.

Purpose and Significance of the New Framework

• Valuation Alignment: The framework is designed to address and narrow the valuation discrepancies often observed between the sponsor (seller) and the InvIT (buyer) during the acquisition of infrastructure assets.
• Risk Management: Enhanced risk mitigation measures have been put in place for the issuance and management of these subordinate units.

Key Features of Subordinate Units

1. Issuance Conditions: Subordinate units can be issued to sponsors or their associates when acquiring an infrastructure project.
2. Rights and Limitations:
   • These units will have no voting or distribution rights compared to ordinary units.
   • At acquisition, subordinate units cannot exceed 10% of the purchase price of the infrastructure project.
   • The total outstanding subordinate units must not surpass 10% of the total outstanding ordinary units of the InvIT.
3. Restrictions on Public Issues: InvITs are prohibited from raising funds through public issues if they have outstanding subordinate units.
4. Performance-Based Reclassification: Subordinate units can be converted into ordinary units after meeting specific performance benchmarks over a three-year period. This reclassification requires in-principal approval from a recognized stock exchange for the listing of these units.
5. Reporting Requirements: The investment manager must report progress on performance benchmarks in the InvIT’s annual report.
6. Pricing: The pricing of subordinate units will adhere to the guidelines applicable to ordinary units.

About InvITs

• InvITs function similarly to mutual funds, allowing individual and institutional investors to directly invest in infrastructure projects. Returns are generated from the income produced by these projects.
• Investments can be channeled directly or through special purpose vehicles (SPVs), with all operations regulated under the SEBI (Infrastructure Investment Trusts) Regulations, 2014.

These amendments by SEBI are expected to enhance the structural and financial robustness of InvITs, facilitating more strategic investment in India’s infrastructure sector while ensuring stringent regulatory oversight and investor protection.