SEBI Proposes Framework for Restricted Return InvITs to Enhance Investor Security

The Securities and Exchange Board of India (SEBI) has issued a consultation paper on a proposed regulatory framework for Restricted Return Infrastructure Investment Trusts (InvITs), dated October 30, 2024. In this model, returns can be structured with downside protection (a floor) and/or an upside cap, differentiating it from traditional InvITs where returns are directly tied to the full performance of the underlying infrastructure assets.

Key features of the proposed Restricted Return InvIT framework include:

• SEBI’s framework allows Restricted Return InvITs to offer either a downside floor, an upside cap, or a combination of both. In cases where returns fall below the guaranteed minimum, sponsors or designated entities must provide funds to ensure unitholders receive a baseline return. Any returns exceeding the cap will be allocated to sponsors or pre-designated entities, limiting investor exposure to high volatility.
• Restricted Return InvITs would be accessible only to sophisticated investors with the ability to understand structured return mechanisms. Access will be limited to privately placed InvITs with a minimum asset value of ₹50,000 crore and high minimum investment and trading thresholds proposed at ₹500 crore.
• To ensure informed participation, investors must sign a waiver acknowledging the structured return limits.
• SEBI’s framework mandates periodic evaluations of InvIT asset performance, coupled with credit ratings for sponsors or affiliated entities that back the downside protection. Credit ratings and risk disclosures will be prominently included in the placement memorandum.
• SEBI has invited public comments on the consultation paper until November 13, 2024, seeking input on aspects like asset value thresholds, minimum investment criteria, and the framework’s overall structure.

This consultation underscores SEBI’s commitment to balancing investment innovation with robust protections for India’s expanding investor base.