Sebi to ease rules for infrastructure investment trusts

Mumbai: The Securities and Exchange Board of India (Sebi), on Thursday proposed to ease norms for infrastructure investment trusts (InvITs) as a way to encourage firms to unlock capital.

In September 2014, the capital markets regulator had allowed firms to launch real estate investment trusts (REITs) and InvITs to help cash-strapped developers get easier access to funds while creating a new investment avenue for institutions and wealthy individuals. However, infrastructure companies have been slow to respond as they sought a relaxation in rules and clarity on taxation.

Some of these concerns have been addressed in the proposed amendments put out by Sebi on Thursday.

Under the new rules, the minimum commitment amount by sponsors in InvITs has been reduced from 25% to 10%. In other words, the company that promotes a trust can hold as little as 10% of the units issued by the trust.

Explaining the relaxation, Sebi said a minimum 25% sponsor commitment may limit monetization and reduce release of capital. “Further, in certain circumstances, this may lead to sponsor putting money, out of its own pocket, in the InvIT so as to maintain the required 25% stake. This would be very onerous at the part of the sponsor,” Sebi said in the paper.

The changes appear to be very helpful, said IRB Infrastructure Developers Ltd chairman and managing director Virendra Mhaiskar.

“We are yet to look at the paper in detail. But it is great news that sponsor commitment has been proposed to be brought down to 10% from 25% earlier as it would help us put more cash into the parent (company) from sale proceeds in SPVs,” he said.

IRB Infrastructure Developers, which operates over 20 road projects in the country, said last week that it would set up an investment trust and transfer at least 12-15 of its existing operational road projects to the trust to free up capital and grow business. The company could raise as much as Rs.15,000 crore, analysts estimate.

Larsen and Toubro (L&T), the country’s largest construction and engineering company, had said last year that it would explore listing its real estate and infrastructure assets in the domestic market through investment trusts.

“In our view, it is inevitable for the infrastructure investment trust route to take shape if we wish to deepen the market for financing infrastructure projects. Dependence on developmental finance institutions or public sector banks is not a sustainable solution for infrastructure financing. Possibly realizing this, the government of India has made initial moves to propagate formation of such financing vehicles,” R. Shankar Raman, chief financial officer of L&T, told Mint on 17 August.

IL&FS Transportation Networks Ltd, which is looking for funds and selling some of its road projects, could consider InvITs as an option to monetize assets, a company spokesperson told Mint on Wednesday, requesting not to be identified as he is not authorized to speak to media.

Additionally, Sebi proposed to allow an InvIT to invest in SPVs that act as holding companies for other SPVs. Sebi proposed to allow this on condition that the InvIT has to hold a controlling interest and at least 50% in such holding companies. The holding company, in turn, has to hold a controlling interest and at least 50% in the underlying SPVs.

To be able to invest in such two-level SPVs, the InvIT has to ensure that at least one authorized representative of the holding company or the InvIT is appointed on the board of the underlying SPVs.

“The (existing) requirement of mandatory distribution of at least 90% of the distributable cash flows shall apply to the underlying SPV(s). 100% of the net distributable cash flows of the holding company shall be distributed to the InvIT,” the Sebi paper said.

While allowing InvITs to invest in holding companies, Sebi proposed that the holding company cannot be engaged in any other activity other than holding of the underlying SPVs.

A domestic InvIT can raise long-term funds from unit holders, helping developers unlock value in their operational or completed projects or repay debt associated with those projects. Infrastructure firms can transfer a portfolio of their operational projects to such a trust and launch it in the market.