InvITs: Legal Avenues for Lenders

As India accelerates its infrastructure development to support its rapid economic growth, Infrastructure Investment Trusts (InvITs), a novel concept, is emerging as a pivotal tool for financing essential infrastructure projects. Recent regulatory enhancements, such as the Reserve Bank of India’s guidelines on ‘Lending by Banks to InvITs’ and key amendments through the Finance Act, 2021, to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993, have strengthened the framework for InvITs.

These changes include recognizing InvITs as ‘borrowers’ under the SARFAESI Act and credit facilities to InvITs as ‘debt’ under the RDDBFI Act, reflecting the government’s commitment to supporting infrastructure investment. By leveraging InvITs, India is poised to bridge the infrastructure funding gap and drive sustained economic progress, aligning with its broader development goals and infrastructure ambitions. In addition, it not only permits the overseas investors, like pension funds, for example, the Canada Pension Plan Investment Board (CPPIB), etc., to invest in InvIT projects but also facilitates the Indian promoters to churn the portfolio by generating cash and investing in the new projects.

Lenders in an InvIT

On October 14, 2019, RBI issued a notification on ‘Lending by Banks to InvITs’, permitting banks to provide credit facilities to InvITs, provided that the underlying special purpose vehicles (SPVs) are not facing financial difficulties in completing the pending projects and subject to the approval of the Board of Directors (BOD) of the bank.  

Lenders, in extending credit facilities to InvITs enter into financing agreements that bind both parties. These agreements detail the facilities extended, mandatory prepayments of cash flows from certain transactions (such as proceeds from expropriation or takeover events by governmental authorities of InvIT assets or project SPVs), events of default, and the consequences of default. These agreements outline the actions banks may take in the event of a default by the InvIT, including terminating commitments under the facilities agreement, enforcing securities provided by the InvIT to secure the loan, and utilizing amounts in the InvIT’s or SPV’s escrow accounts. Lenders can enforce contractual remedies against an InvIT, but if such remedies are rendered impossible or if banks choose otherwise, they may proceed to court to recover the facilities extended.

Rights of Lenders against InvITs

InvITs may avail themselves of various loan facilities from banks, such as repaying the existing loans taken by SPVs incorporated into the InvIT structure, covering working capital requirements, or acquiring shares in other entities subject to the conditions prescribed by RBI. These facilities extended by banks must be safeguarded.

The SARFAESI Act, 2002, and the RDDBFI Act, 1993, were recently amended through the Finance Act, 2021, to incorporate the provisions protecting the interests of banks that have extended credit facilities to an InvIT. These amendments provide banks with judicial recourse to enforce their rights in the securities of InvITs and recover unpaid dues. Banks may proceed under Section 13 of the SARFAESI Act, 2002 that deals with ‘Enforcement of Security Interest’, or Section 19 of the RDDBFI Act, 1993 that deals with ‘Application to the Tribunal’, to enforce their security interests against the InvIT and recover pending dues.

InvITs have been classified as ‘borrowers’ under Section 2(f) of the SARFAESI Act, pursuant to Section 2(da) of the Securities Contracts (Regulation) Act, 1956, which defines ‘pooled investment vehicles’ as inclusive of a ‘business trust’ as defined in Section 2(13A) of the Income-tax Act, 1961 and registered with SEBI, i.e., InvITs. This definition includes any person or ‘pooled investment vehicle’ that has received financial assistance from a bank or financial institution. It also covers those who have provided guarantees, created mortgages, or pledged securities for such financial assistance, and any entity that becomes a borrower of an asset reconstruction company following the company’s acquisition of rights or interests related to such financial assistance.

Additionally, the facilities extended by banks are considered ‘debt’ under the SARFAESI Act, 2002, and Section 2(g) of the RDDBFI Act, 1993. This definition encompasses any liability (including interest) claimed as due from any person or ‘pooled investment vehicle’ by a bank, financial institution, or consortium thereof, during business activities. This liability can be in cash or otherwise, whether secured or unsecured, assigned, payable under a decree or court order, arbitration award, or mortgage, and legally recoverable on the application date. It also includes any unpaid debt securities remaining after a ninety-day notice period served upon the borrower by the debenture trustee or other authority in favor of whom the security interest is created.

However, while these amendments have strengthened  the legal recourse available to lenders, the National Monetization Pipeline Volume I: Monetization Guidebook, published by NITI Aayog on August 23, 2021, highlights an important caveat. According to the guidebook, since InvITs are not recognized as ‘legal persons’ under existing regulations, the Insolvency and Bankruptcy Code (IBC) regulations are not applicable to financial assistance extended to InvITs. This means that the lenders currently lack a formal process for recourse to project assets through IBC mechanisms or the ability to invoke key provisions under IBC, such as the powers granted to the lenders as a part of the Committee of Creditors (CoC) under Section 28 of IBC during the corporate insolvency resolution process (CIRP) to change the management of the corporate debtor (CD). Evidently, a similar remedy, such as a change in sponsor of the InvIT or transfer of assets, remains unavailable to the lenders.

Therefore, despite the protections provided under the SARFAESI Act and the RDDBFI Act, the absence of IBC provisions limits the comfort level for investors. Though it is observed that lenders do have recourses available, there is yet to be a judgment or order on the enforcement rights of lenders under the SARFAESI Act and the RDDBFI Act. Hence, the effectiveness and practical implications of the identified rights are yet to be tested in the court of law.

Encouragement to Investors: Crucial

InvITs have been conceptualized to encourage investors to participate in the infrastructure development of the country. Despite their potential, InvITs are a relatively novel concept, and several issues need to be addressed. One such issue is the protection of the rights of the lenders within an InvIT. Recently, the RBI’s permission for bank lending to InvITs has highlighted the importance of safeguarding these rights. The recent amendments represent a significant step forward in protecting lender interests and ensuring the viability of InvITs as a financing tool. Nevertheless, the exclusion of InvITs from IBC regulations indicates a need for further reforms to create a more comprehensive legal framework. Incorporating InvITs into IBC proceedings will allow leeway to investors in securing an additional degree of protection and route in asset recovery, increasing the allure towards InvITs. However, the practical ramifications and efficacy of the revisions in judicial forums need to be explored, this shift in the lending landscape is expected to benefit investment vehicles as well as lenders. Nevertheless, InvITs still have a long way to go in fully achieving their intended purpose, and broader participation across various sectors is needed to effectively establish and grow InvITs.

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Photo by Thicha Satapitanon on Canva

InvITs may avail themselves of various loan facilities from banks, such as repaying the existing loans taken by SPVs incorporated into the InvIT structure, covering working capital requirements, or acquiring shares in other entities subject to the conditions prescribed by RBI. These facilities extended by banks must be safeguarded.

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SEBI’s 204th Board Meeting: A Look at Key Decisions

The Securities and Exchange Board of India (“SEBI”) convened its 204th Board Meeting in Mumbai on March 15, 2024.[1] During this session, several significant decisions were taken to enhance the regulatory framework governing the Indian securities market. This article provides an overview of the key approvals granted by SEBI in the said Board Meeting.

  1. Expediting timelines: Launch of beta version of T+0 settlement cycle approved

SEBI has approved the launch of the beta version of optional T+0 settlement. This initiative allows for same-day settlement on an optional basis for a limited set of 25 scrips with a select group of brokers.

The existing T+1 rolling settlement cycle was introduced back in September 2021 and was fully implemented in January of last year. The significant advancements in technology, architecture, and capacity within Market Infrastructure Institutions (“MIIs”) have created opportunities to further expedite clearing and settlement timelines. Recognising the potential benefits of shortening settlement cycles, such as enhanced cost efficiency, transparent charges, and improved risk management across the securities market, it was proposed to introduce the T+0 settlement cycle on an optional basis, alongside the existing T+1 cycle. Days after the launch was approved by the Board, a circular was issued providing certain operational guidelines and directives to MIIs.[2]

  1. Certain FPIs exempted from additional disclosure requirements

The Board approved a proposal to exempt additional disclosure requirements for Foreign Portfolio Investors (“FPIs”) with over 50% of their India equity Assets Under Management (“AUM”) in a single corporate group. This exemption applies if the concentrated holdings of these FPIs are in a listed company with no identified promoter, provided certain conditions are met:

i) The FPI holds not more than 50% of its India equity AUM in the corporate group, excluding its holding in the parent company with no identified promoter.

ii) The combined holdings of all such FPIs in the company with no identified promoter, which exceed the 50% concentration criteria and are not exempted, are less than 3% of its total equity share capital.

SEBI has elaborated on the criteria for exempting FPIs in its circular dated March 20, 2024.[3]

  1. Material changes by FPIs categorised into 2 types, timelines for their disclosure relaxed

The Board approved a proposal to extend the timelines for the disclosure of material changes by FPIs, aiming to facilitate ease of doing business. Currently, FPIs are mandated to report material changes to their Designated Depository Participant (“DDP”) within seven working days. These material changes will now be categorised into two types:

Type I – FPIs are required to notify their DDP of these material changes within seven working days of occurrence, with supporting documents within 30 days.

Type II – FPIs are required to inform their DDP of these material changes along with any supporting documents within 30 days of occurrence.

  1. Flexibility provided in dealing with securities subsequent to expiry of FPI registration

To enhance the ease of conducting business for FPIs, the Board has approved the following measures:

(a) Expired FPI registrations due to non-payment can be reactivated within 30 days. During this period, FPIs can sell their securities. If the registrations are not reactivated, a 180-day window is provided for securities disposal.

(b) A minimum period of 180 days, or until the end of the registration block, is ensured for securities disposal in cases of adverse compliance changes in the FPI’s home jurisdiction or non-submission of required documents.

(c) If securities remain unsold after the initial 180-day period:

I. FPIs have an additional period of 180 days for disposal of securities, with a 5% financial disincentive on sale proceeds, which shall be credited by the custodian to SEBI’s Investor Protection and Education Fund (“IPEF”).

II. The securities remaining unsold after the expiry of the additional 180-day period will be deemed to be compulsorily written off by the FPI.

(d) For existing cases, FPIs with expired registrations have a one-time opportunity of 360 days to dispose of securities, with the first 180 days exempt from financial disincentives. Subsequently, any unsold securities will be compulsorily written off. Such unsold securities will be transferred to an escrow account managed by an exchange broker. The broker will be required to sell the securities at market price and transfer the sale proceeds to SEBI’s IPEF.

  1. Amendments to facilitate ease of doing business for companies heading for IPOs

The Board has approved the following amendments to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:

(a) Eliminating the one per cent security deposit requirement in public or rights issues of equity shares.

(b) Allowing promoter group entities and non-individual shareholders holding more than five per cent of post-offer equity share capital to contribute towards minimum promoters’ contribution (“MPC”) without being classified as promoters.

(c) Considering equity shares from the conversion of compulsorily convertible securities held for a year before filing the DRHP for meeting MPC requirement.

(d) Revising the requirement for fresh filing for increasing or decreasing the size of offer for sale (“OFS”) based on either the issue size in rupees or the number of shares disclosed in the draft offer document.

(e) Providing flexibility to extend the bid or offer closing date by at least one day in case of force majeure events, instead of the current requirement of at least three days.

  1. Changes to LODR Regulations to ease compliance

Certain amendments to the SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015 (“LODR Regulations”), have been approved. The changes introduced are as follows:

(a) The compliance requirements for listed entities regarding market capitalisation will now be based on the average market capitalisation of the six months ending on December 31, rather than a single day’s market capitalisation on March 31. Additionally, to ease compliance, a sunset clause of three years is being introduced, which will cease the applicability of market capitalisation-based provisions after this period.

(b) The timeline for filling vacancies of Key Managerial Personnel has been extended from three months to six months.

(c) The prior intimation time for board meetings had been reduced to two working days.

(d) Listed entities are now permitted a longer gap of 210 days between two consecutive meetings of the Risk Management Committee, offering them flexibility in scheduling these meetings.

  1. Verification of market rumours: New measures to ensure uniform approach

To ensure a consistent approach to verifying market rumours by equity listed entities, the Industry Standards Forum (“ISF”), composed of ASSOCHAM, CII, and FICCI, collaborated on a pilot project. This project aimed to establish standards for effectively implementing rumour verification requirements in consultation with SEBI. Following discussions with ISF and stakeholders, the Board approved the below measures to facilitate a uniform approach:

(a) Specifying objective and uniformly assessing criteria for rumour verification based on material price movements of the listed entity’s equity shares.

(b) Considering unaffected prices for transactions where pricing norms are prescribed under SEBI Regulations, provided that the rumour related to such transactions is confirmed within twenty-four hours of the material price movement.

(c) Mandating timely responses from promoters, directors, key managerial personnel, and senior management of the listed entity for verifying market rumours.

(d) Clarifying that unverified events or information reported in print or electronic media will not be considered as ‘generally available information’ under SEBI (Prohibition of Insider Trading) Regulations, 2015.

  1. Category I and II AIFs allowed to pledge equity holdings in infrastructure sector investee companies

To enhance ease of business for Alternative Investment Funds (“AIFs”) and promote private capital participation in infrastructure financing, the Board has approved a measure granting flexibility to Category I and II AIFs. This measure allows these AIFs to create an encumbrance on the equity of their investee companies in the infrastructure sector. This enables the investee companies to raise debt or loans more easily, provided they adhere to specific conditions, including compliance with RBI regulations.

The infrastructure sector companies eligible for this provision are those engaged in the development, operation, or management of projects within the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure sub-sectors issued by the Government of India.

  1. AIFs mandated to conduct due diligence of investors and investments

The SEBI Board has approved the proposal of mandating AIFs, their Managers, and Key Management Personnel to conduct specific due diligence on their investors and investments. This measure aims to prevent AIFs from circumventing regulations administered by financial sector regulators. By ensuring verifiable compliance with these due diligence requirements, the proposal sets the stage for the introduction of additional ease of doing business measures for AIFs, facilitating sustained capital formation. To ensure clarity and consistency, the Industry Standards Forum for AIFs, in consultation with SEBI, will formulate specific implementation standards for conducting due diligence on AIF investors and investments.

  1. High value debt listed entities: One-year extension granted for mandatory applicability of listing norms

Approval has been accorded for extending the timeline for the mandatory applicability of listing norms, specifically Regulations 16 to 27 of the LODR Regulations, for high value debt listed entities till March 31, 2025. Hence, the said provisions will be applicable on a ‘comply or explain’ basis during the period leading up to the new deadline.

  1. Unliquidated investments can be carried forward into ‘Dissolution Period’ after expiry of AIF’s tenure

Under this approval, AIFs are permitted to retain unliquidated investments, necessitated by a lack of liquidity during the winding-up process, within the same scheme of the AIF. They may then enter a Dissolution Period, during which the value of such investments will be recognised according to SEBI norms for inclusion in the manager’s track record and reporting to Performance Benchmarking Agencies. This Dissolution Period replaces the existing option of initiating a new scheme, known as the Liquidation Scheme, which was introduced last year. Additionally, the Board has sanctioned a one-year extension of the Liquidation Period for AIF schemes dealing with unliquidated investments, whose initial Liquidation Period has expired in the past or is set to expire within three months from the date of notification of amendments to AIF Regulations, subject to specified conditions.

  1. Framework approved for issuance of subordinate units by privately placed InvITs

The Board approved amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014, to establish a framework for the issuance of subordinate units by privately placed InvITs. This framework is designed to address valuation gaps that may occur between the Sponsor (the asset seller) and the InvIT (the asset buyer) and includes risk mitigation measures for these units.

Though the 2014 Regulations allow InvITs to issue subordinate units to sponsors and their associates, there is no framework providing a detailed mechanism as of yet. In light of the same, SEBI came out with consultation papers dated December 9, 2023, and January 10, 2024, presenting the proposed framework (click here and here to read more about the proposals). However, to begin with, the scope of the amendments approved by the Board is limited to the issuance of subordinate units by privately placed InvITs.

  1. Stock exchange to be recognised as supervisory body for research analysts and investment advisers

A decision has been taken to recognise a stock exchange as the Research Analyst Administration and Supervisory Body (“RAASB”) and the Investment Advisers Administration and Supervisory Body (“IAASB”). Incidentally, the validity of recognition granted to BSE Administration and Supervision Limited for the administration and supervision of Investment Advisers will soon come to an end.

Similar to the treatment of Investment Advisors, the RAASB framework will not entail fees for Research Analysts. Additionally, to ensure smooth implementation and avoid disruption, existing registered Research Analysts and Investment Advisers will be automatically enlisted.

  1. SEBI Budget approved

The Board also approved the SEBI Budget for the financial year 2024-25.

Takeaways

SEBI’s decisions certainly reflect its commitment towards furthering ease of doing business. Notably, AIFs are enabled to carry forward unliquidated investments into the Dissolution Period after expiry of the Fund’s tenure. This follows that the investments may be held in the same AIF scheme without having to launch a Liquidation Scheme. SEBI has also provided for flexibility when it comes to the creation of encumbrance on the equity of AIF’s infrastructure sector investee companies. At the same time, SEBI strikes a balance by obligating AIFs to carry out due diligence of their investors and investments. Various other stakeholders including FPIs, Iisted companies, etc. stand to benefit from the decisions. Moreover, the new developments will expedite clearing and settlement timelines, prevent circumvention of regulations, and boost infrastructure development.

References:

[1] Press release on the Board Meeting, dated March 15, 2024, is available at: https://www.sebi.gov.in/media-and-notifications/press-releases/mar-2024/sebi-board-meeting_82286.html

[2] Circular dated March 21, 2024, can be accessed at: https://www.sebi.gov.in/legal/circulars/mar-2024/introduction-of-beta-version-of-t-0-rolling-settlement-cycle-on-optional-basis-in-addition-to-the-existing-t-1-settlement-cycle-in-equity-cash-markets_82455.html

[3] Available at: https://www.sebi.gov.in/legal/circulars/mar-2024/amendment-to-circular-for-mandating-additional-disclosures-by-fpis-that-fulfil-certain-objective-criteria_82418.html

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Photo by Roman Castillo on Pexels

SEBI’s decisions certainly reflect its commitment towards furthering ease of doing business. Notably, AIFs are enabled to carry forward unliquidated investments into the Dissolution Period after expiry of the Fund’s tenure. This follows that the investments may be held in the same AIF scheme without having to launch a Liquidation Scheme. SEBI has also provided for flexibility when it comes to the creation of encumbrance on the equity of AIF’s infrastructure sector investee companies. At the same time, SEBI strikes a balance by obligating AIFs to carry out due diligence of their investors and investments. Various other stakeholders including FPIs, Iisted companies, etc. stand to benefit from the decisions. Moreover, the new developments will expedite clearing and settlement timelines, prevent circumvention of regulations, and boost infrastructure development.

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