Sebi issues draft guidelines for infrastructure investment trusts

Mumbai: The Securities and Exchange Board of India (Sebi) on Thursday put out draft regulations for so-called infrastructure investment trusts that were announced in the finance minister’s budget speech last week to provide easier financing options to developers of public works.

Such trusts will be able to invest in infrastructure projects only directly or through special purpose vehicles (SPVs), the market regulator said. For public-private partnership (PPP) projects, investments can be routed only be through an SPV, it said.

A special purpose vehicle is a company created for a specific purpose. A PPP is one that usually involves a private entity building public infrastructure that is owned by the government, but from which it earns revenue (through a user charge, toll or a revenue share) over the duration of its agreement with the government.

Sebi came out with a consultation paper on infrastructure investment trusts on 20 December 2013 on which it sought comments till 20 January.

In its draft regulations released on Thursday, Sebi said that if an investment trust proposes to invest at least 80% of its assets in completed and revenue generating infrastructure assets, it has to raise funds through a public issue of units. These sales will need to have a minimum subscription size and trading lot of at least Rs.5 lakh. Of the remaining 20%, such trusts can invest a maximum of 10% in under-construction infrastructure projects.

If such a trust proposes to invest more than 10% of its assets in under-construction public works, it has to mandatorily raise funds through private placement from qualified institutional buyers (typically banks and other financial institutions) and corporate bodies only, according to the draft norm.

For such trusts, the minimum investment and trading lot will be of Rs.1 crore and a part of the assets under such trusts will have to be mandatorily invested in at least one completed and revenue generating project and in at least one pre-COD (commercial operation date) project, said the draft regulations.

Sebi’s draft regulations on infrastructure investment trusts come a week after finance minister Arun Jaitley, in his budget speech, said: “As an innovation, a modified REITs (real estate investment trusts) type structure for infrastructure projects is also being announced as Infrastructure Investment Trusts, which would have a similar tax efficient pass through status, for PPP and other infrastructure projects.”

“These structures would reduce the pressure on the banking system while also making available fresh equity. I am confident these two instruments would attract long term finance from foreign and domestic sources including the NRIs (non-resident Indians),” Jaitley had said in the budget.

India needs $1 trillion of investments in infrastructure, audit firm Deloitte said in a report titled A Trillion Dollar Opportunity, released earlier this year.

The market regulator said that listing would be mandatory for both publicly offered and privately placed infrastructure investment trusts.

Both categories of investments trusts may also sell a minimum 5% stake to strategic investors who would typically be banks or multilateral finance institutions, Sebi said.

As a prudential measure, Sebi said the aggregate consolidated borrowing of such investment trusts and their underlying SPVs should never exceed 49% of the value of the trust’s assets. However, this may exclude any debt infused by the trust in the underlying SPV, the regulator added.

For any borrowing exceeding 25% of the value of assets, the trust will be required to secure approval from unit holders and a credit rating from a Sebi-registered credit rating agency, the regulator said.

Sebi has sought comments on the draft regulations by 24 July 2014.

Infrastructure investment trusts will provide an additional and easier way of routing investments, said Parvez Umrigar, co-head of structured investments group at Piramal Enterprises Ltd. “...today when SPVs are formed they are all created under a holding company and the overall structure is not conducive for listing,” he said. “So, the trust structure is a good way forward.”

Umrigar said the formation of such investment trusts could have been allowed only for commissioned projects to build investor confidence.

“Historically, for projects which are not commissioned, people have often gone too long on the completion timeline that landed several banks also in trouble. If the same thing repeats in the trust structure it could dent the confidence in the system,” he warned.