SEBI releases consultation paper for amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014
SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT regulations) were notified on 26th September, 2014, thereby providing a regulatory framework for registration and regulation of InvITs in India . The regulations, inter alia, prescribe conditions for making a public offer and private placement, initial and continuous disclosures, investment conditions, unit-holder approval requirements, related party disclosures, etc.
Pursuant to the notification of InvIT regulations, representations and suggestions were received from various market participants for making changes to the said regulations. Based on the recommendations received, a consultation paper proposing amendments to InvIT regulations has been issued by SEBI seeking public comments on August 20, 2015. The aforesaid paper dealt with certain issues which have been taken up again in this consultation paper to insert certain additional conditions, based on feedback received from all stakeholders viz. government, market participants, industry associations, regulatory bodies, etc.
The issues and the proposals for amendment are as under:
Removing the restriction on the SPV (only in case of such SPV being a Holding Company) to invest in other SPVs holding the assets.
Current regulatory requirement: Regulation 2(1)(zy) of InvIT Regulations, inter alia states that a SPV is a company or LLP, which holds not less than ninety per cent of its assets directly in infrastructure projects and does not invest in other SPVs.
Request for change: It has been represented that infrastructure assets in India are usually held through different Special Purpose Vehicles (SPVs), where the promoters of such SPVs create separate holding companies (HoldCo) which in turn hold stake in the multiple SPVs which have infrastructure projects under them. Thus, it has been requested that InvITs be allowed to invest in infrastructure projects through such SPVs (HoldCo) which hold stake in other SPVs having infrastructure assets
The rationale for necessitating such change are as under:
· In Infrastructure sector, specifically for PPP projects, certain concession agreements do not allow for direct change in control in SPVs which holds the assets, thereby making it possible to transfer shares at holding company level only.
· Certain contracts, for example, power purchase agreements in power sector require consents for direct change of control which may be time consuming and not efficient.
· A large proportion of the infrastructure projects in India are financed by Indian financial institutions on a project finance basis where lenders require a pledge on the shares of the SPV. In such cases, if the SPV is held directly by the InvIT, the lenders would seek pledge of the SPV shares held by the InvIT. This might not be attractive for the InvIT investors.
· There are also concerns of tax inefficiencies, lender considerations, difficulties in exit for financial investors, etc. if investment in the HoldCo is not allowed.
Mandatory sponsor holding in InvIT
Current regulatory requirement: Regulation 12(3) of the InvIT regulations requires the sponsor(s) of the InvIT to hold, on a collective basis, not less than twenty five per cent of the total units of the InvIT on a post-issue basis for a period of not less than 3 years from the date of the listing of such units.
Need for change: It has been represented that the road assets in India are operated under a separate concession with NHAI or the state. There is a separate SPV for each concession. The project lender(s) typically fund up to 80% of the project cost in the SPV's while the balance 20% is the sponsor's equity contribution in the SPV. InvITs are considered to be investment vehicles, for providing stable cash flows to the investors. The distributable cash flow received by the InvIT, in the form of dividends from assets and servicing of debt instruments subscribed by the InvIT in the assets, are utilized towards meeting the yield requirements of investors.
Approval of related party transactions by the unit holders
Current regulatory requirement:
· Regulation 22(3) and 22(4) of the InvIT regulations requires the approval of 60% of the unit holders, apart from related parties, for passing related party transactions that are procedural in nature.
· Regulation 22(5) requires approval of 75% of the unit holders, apart from related parties, for passing of special resolutions such as change in investment manager, investment strategy, delisting of units, etc.
Need for change: Representations have been received that the requirement of 60% and 75% of investor approval may not be feasible, especially when related parties have to abstain from voting. Further, it has been represented that the requirement of unit holder approval, in case of related party transactions (RPTs) should be in line with the approval requirement under the Companies Act, 2013.
Proposal: Section 188 of the Companies Act, 2013 lists out the related party transactions which require approval from the board of directors and/or the shareholders. The section inter-alia states that if such RPTs meet the prescribed thresholds then approval is required from the shareholders by way of passing of an ordinary resolution. The section also requires that the directors who are related to the transaction under discussion, in the meeting, shall not be present at the meeting during the discussion and the directors who are related parties to such contract or agreement cannot vote for the same. Given the nature of the InvIT, a complete alignment with the Companies Act cannot be made. It has been indicated that it would not be possible to achieve the current level of thresholds as prescribed in the InvIT regulations. Accordingly, the following thresholds are proposed:
(i) For the purpose of regulation 22(3) and 22(4), the matter shall be approved if the votes cast by the unit holders in favor of the proposal shall be more than the number of votes cast by the unit holders against it.
(ii) For the purpose of regulation 22(5), the matter shall be approved if the votes cast by the unit holders in favor of the proposal shall be at least one and half times more than the number of votes cast by the unit holders against it.
(iii) iii. Further, in both the above cases, the voting by any person, who is a related party in such transaction, as well as associates of such person(s) shall not be taken into account
Eligibility Criteria for Investment Manager
Current regulatory requirement: Regulation 4(2)(e)(ii) of the InvIT regulations requires the investment manager to have not less than five years experience in fund management or advisory services or development in the infrastructure sector.
Proposal : Those Investment Managers, which do not have atleast 5 years prior experience, would be allowed subject to the condition that sponsors have at least 5 years of experience in fund management or advisory services or development in the infrastructure sector (similar to what has been allowed for sponsor) subject to the condition that sponsor is an associate of investment manager. The other conditions as prescribed in regulation 4(2)(e) shall remain unchanged.
Allowing InvIT to lend to the underlying SPVs-- Current regulatory requirement: Regulation 18(10) of the InvIT regulations doesn't allow the InvIT to undertake lending to any person.
Proposal: InvIT regulations may be amended to allow lending. However, the same may be restricted to only the SPVs in which the InvIT has invested, subject to other conditions as deemed necessary
Please find enclosed detailed Consultation paper for amendments to the SEBI (Infrastructure Investment Trusts) Regulations,2014. SEBI has invited comments or suggestions on the enclosed consultation paper. Please provide your suggestions (if any) at surbhi@phdcci.in latest by 17th June 2016.