SECURITIES EXCHANGE BOARD OF INDIA (INFRASTRUCTURE INVESTMENT TRUSTS) REGULATIONS, 2014 – AN OVERVIEW – PART I

[Mr. M. GOVINDARAJAN]

In exercise of the powers conferred under Section 30 read with Sections 11 and 12 of Securities Exchange Board of India Act, 1992, laying a framework for infrastructure investment trusts and registration and regulation thereof, SEBI made the ‘SEBI (Infrastructure Investment Trusts) Regulations, 2014 which came into effect from 26.09.2014.

Before going to discuss the various aspects of these regulations it is important to see the definition of some terms that may be useful to deal with these regulations.

Regulation 2(1) (b) defines the term ‘associate’ of any person as including-

• any person controlled, directly or indirectly by the said person;
• any person who controls, directly or indirectly, the said person;
• where the said person is a company or a body corporate, any person(s) who is designated as promoter(s) of the company or body corporate and any other company or body corporate with the same promoter(s);
• where the said person is an individual, any relative of the individual;
• where the said person is a company or a body corporate or an LLP, its group companies;
• companies or LLPs under the same management;
• where the said person is an InvIT, related parties to the InvIT;
• any company or LLP or body corporate in which the person or its director(s) or partner(s) holds, either individually or collectively, more than 15% of its paid-up equity share capital or partnership interest, as the case may be;

Regulation 2(1)(i) defines the terms ‘completed and revenue generating project’ as an infrastructure project, which prior to the date of its acquisition by, or transfer to, the InvIT, satisfies the following conditions:

• the infrastructure project has achieved the commercial operations date as defined under the relevant project agreement including concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of the project or in any agreement entered into with the lenders;
• the infrastructure project has received all the requisite approvals and certifications for commencing operations; and
• the infrastructure project has been generating revenue from operations for a period of not less than one year.

Regulation 2(1)(j) defines the term ‘concession agreement’ as an agreement entered into by a person with a concessioning authority (the public sector concessioning authority in PPP Projects) for the implementation of the project as provided in the agreement;

Regulation 2(1)(o) defines the terms ‘eligible infrastructure project’ as an infrastructure project which prior to the date of its acquisition by, or transfer to, the InvIT, satisfies the following conditions:

• for PPP Projects-

• the infrastructure project is completed and revenue generating; or
• the infrastructure project is a pre-COD project;

• in non-PPP projects, the infrastructure project has received all the requisite approvals and certifications for commencing construction of the project.

Regulation 2(1)(t) defines the term ‘infrastructure’ which includes all infrastructure sub-sectors defined vide notification of the Ministry of Finance dated 07.10.2013 and shall include any amendments or additions made thereof.

Regulation 2(1)(z) defines the terms ‘investment management agreement’ as an agreement between the trustee and the investment manager which lays down the roles and responsibilities of the investment manager towards the InvIT.

Regulation 2(1)(zb) defines the terms ‘InvIT assets’ as assets owned by the InvIT, whether directly or through a SPV and includes all rights, interests and benefits arising from and incidental to ownership of such assets.

Regulation 2(1)(zf) defines the terms ‘investment manager’ as a company or LLP or body corporate which manages assets and investments of the InvIT and undertakes activities of the InvIT as specified under Regulation 10.

Regulation 2(1)(zm) defines the term ‘PPP Project’ as an infrastructure project undertaken on a public private partnership basis between a public concessioning authority and a private SPV concessionaire selected on the basis of open competitive bidding or on the basis of an memorandum of undertaking with the relevant authorities.

Regulation 2(1) (zn) defines the term ‘Pre-COD Project’ as an infrastructure project which-

• has not achieved commercial operation date as defined under the relevant project agreements including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders; and
• has
  • achieved completion of at least 50% of the construction of the infrastructure project as certified by an independent engineer of such project; or
  • expended not less than 50% of the total capital cost set forth in the financial package of the relevant project agreement.

Regulation 2(1)(zp) defines the term ‘project manager’ as the person designated as the project manager by the InvIT, responsible for achieving execution of the project as specified under regulation 11 and in case of PPP projects, shall means the entity responsible for such execution and achievement of project milestones in accordance with the concession agreement or any other relevant project document.

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Regulation 2(1)(zv) defines the term ‘relates parties of the InvIT’ which shall include-

• parties to the InvIT (sponsor, investment manager, project manager and the trustee);
• any unit holder holding directly or indirectly more than 20% of the units of the InvIT;
• associates, promoters, directors and partners of the persons mentioned above.

Regulation 2(1)(zx) defines the term ‘right-of-first-refusal’ as the right given to the InvIT by a person to enter into a transaction with it before the person is entitled to enter that transaction with any other party.

Regulation 2(1)(zy) defines the terms ‘Special purpose vehicle’ as any company or LLP-

• in which the InvIT holds or proposes to hold controlling interest and not less than 50% of the equity share capital or interest. In case of PPP projects where such acquiring or holding is disallowed by government or regulatory provisions under the concession agreement or such other agreement, this clause shall not apply and shall  be subject to provisions under proviso to sub regulation (3) of regulation 12;
• which holds not less than 90% of its assets directly in infrastructure projects and does not invest in other SPVs; and
• which is not be engaged in any other activity other than activities pertaining to and incidental to the underlying infrastructure projects.

Regulation 2(1)(zz) defines the term ‘sponsor’ as any company or LLP or body corporate which sets up the InvIT and is designated as such at the time of application made to the Board and in case of PPP projects, shall mean the infrastructure developer or a special purpose vehicle holding concession agreement.

Regulation 2(1)(zza) defines the term ‘strategic investor’ as-

• an infrastructure finance company registered with Reserve Bank of India as a non banking financial company;
• a scheduled commercial bank;
• an international multilateral financial institution;
• a systemically important non banking financial companies registered with Reserve Bank of India;
• a foreign portfolio investors, who together invest not less than 5% of the total offer size of the InvIT or such amount as may be specified by the Board from time to time.

Regulation 2(1)(zzc) defines the term ‘under-construction project’ as an infrastructure project whether PPP or non-PPP, which has not achieved commercial operation date as defined under the relevant project agreements including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or in any agreement entered into with the lenders.

Registration of Infrastructure Investment Trusts (InvIT)

To act as InvIT under these regulations the person has to get certificate of registration from the Board.  The eligibility criteria are as follows:

• the applicant should be a trust and the instrument of trust is in the form of deed duly registered in India under the provisions of Registration Act, 1908;
• the main objective of the trust deed should be in accordance with these regulations and includes responsibilities of the trustee;
• persons who have been designated as sponsor(s), investment manager and trustee are separate entities;
• with regard to sponsor(s)-

• there shall not be more than 3 sponsors;
• each sponsor has-

• a net worth of not less than ₹ 100 crore if it is a body corporate or a company; or
• net tangible assets of value not less than ₹ 100 crore in case it is a LLP;

• whether the sponsor or its associate has a sound track record (experience of at least 5 years and where the sponsor is a developer, at least two projects of the sponsors have been completed) in development of infrastructure or fund management in the infrastructure sector;

• with regard to investment manager-

• to have a net worth of not less than ₹ 10 crores if the investment manager is a body corporate or a company or net tangible assets of value not less than ₹ 10 crores in case the investment manager is an LLP;
• to have not less than 5 years of experience in fund management or advisory services or development in the infrastructure sector;
• to have not less than 2 employees who have at least 5 years experience each, in fund management or advisory services or development in the infrastructure sector;
• to have not less than one employee who has at least 5 years experience in the relevant sub-sector(s) in which the InvIT has invested or proposes to invest;
• to have not less than half of its directors in case of a company or members of the governing Board in case of LLP as independent and not directors or members of the governing Board of another InvIT;
• to have an office in India from where the operations pertaining to the InvIT is proposed to be conducted;
• to have entered into an investment management agreement with the trustee which provides for the responsibilities of the investment manager;

• the project implementation agreement has been entered into between the project manager, the concessionaire SPV and the trustee acting on behalf of the InvIT which sets out obligations of the project manager with respect to execution of the project;
• with regard to the trustees, the trustee-

• is registered with the Board under SEBI (Debenture Trustees) Regulations, 1993 and is not an associate of the sponsor(s) or manager; and
• has such wherewithal with respect of infrastructure, personnel, etc., to the satisfaction of the Board and in accordance with circulars or guidelines as may be specified by the Board;

• no unit holder enjoys preferential voting or any other rights over another unit holder;
• there shall not be multiple classes of units of InvITs;

The registration process is as detailed below:

• The application for grant of certificate of registration as an InvIT shall be made by the sponsor in Form A along with a non refundable application fee of ₹ 1 lakh;
• The applicant is to describe clearly at the time of registration details pertaining to the proposed activities;
• The applicant, sponsor(s), investment manager, project manager and trustee are fit and proper persons based on the criteria as specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008;
• The applicant is to indicate whether any previous application for grant of certificate made by the applicant or any related party has been rejected by the Board;
• The applicant is to indicate whether any disciplinary action has been taken by the Board or any regulatory authority against the applicant or any related party under the Act or the regulations or circulars or guidelines made there under;
• The Board may require the applicant to furnish any such information or clarification for the purpose of processing the application;
• The Board may, to protect the interests of investors, appoint any person to take charge of records, documents of the applicant and for this purpose, also determine the terms and conditions of such appointment;
• The Board shall take into account requirements for the purpose of considering grant of registration;
• The Board, if desires, may require the applicant or its authorized representative(s) to appear before the Board for personal representation in connection with the grant of certificate;
• The Board on being satisfied that the applicant fulfils the requirements shall send an intimation to the applicant and on receipt of the payment of registration fees (Rs.10 lakhs) grant certificate of registration in Form B;
• The Board may grant in-principle approval to the applicant where it deems fit and on satisfaction of all requirements grant final registration to the applicant;
• The registration may be granted with such conditions as may be deemed appropriate by the Board which are as follows:

• The InvIT shall abide by the provisions of the Act and these regulations;
• The InvIT shall forthwith inform the Board in writing, if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any material change in the formation already submitted;
• The InvIT and parties to the InvIT shall satisfy with the conditions specified;
• The InvIT and the parties to the InvIT shall comply, at all times, with the code of conduct as specified.

The procedure for refusal of registration is as follows:

• After considering the application if the Board is of the opinion that a certificate should not be granted to the applicant, it may reject the application after giving the applicant a reasonable opportunity of being heard;
• The decision of the Board to reject the application shall be communicated to the applicant within 30 days of the decision.

The surrender of the certificate is under the following circumstances:

If the InvIT fails to make any offer of units (discussed in detail in Part II of the article) whether by way of public issue or private placement within 3 years from the date of registration with the Board, it shall surrender its certificate of registration to the Board and cease to operate as an InvIT.   The Board may extend the period of said 3 years to another one year.   The InvIT my later re apply for registration, if it so desires.

Powers of SEBI

The following are the powers of SEBI:

To call for information

• The Board may at any time call for any information from the InvIT and the parties to the InvIT or any unit holder or any other person with respect to any matter relating to activity of the InvIT;The said information should be furnished to SEBI within the time specified;

Right to inspect

• The Board may suo motu or upon receipt of information or complaint appoint one or more persons as inspecting officers to undertaken inspection of the books of account, records and documents for any of the following reasons-

• to ensure that the books of account, records and documents are being maintained by the InvIT or parties to the InvIT in the manner specified in these regulations;
• to inspect into complaints received from unit-holders, clients or any other person, on any matter having a bearing on the activities;
• to ascertain whether the provisions of the Act and these regulations are being complied with by the InvIT and the parties to the InvIT; and
• to inspect suo motu into the affairs of the InvIT, in the interest of the securities market or in the interest of investors;

• Before inspection the Board shall give not less than 10 days time to the trustee;
• Where the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an order in writing, direct that the inspection of the affairs of the InvIT be taken up without notice;
• The obligation on the part of the InvIT, parties to InvIT etc., are as follows:
  • To produce before the inspecting officer such books, accounts and other documents in his custody or control and furnish him with such statements and information as the inspecting officer may require for the purposes of investigation;
  • To give to the inspecting officer all such assistance and to extend all such co-operations as may be required in connection with the inspection and to furnish such information as may be sought by the inspecting officer in connection with the inspection;
  • The inspecting officer is having power to examine on oath and record the statement of any employees and directors or parties or any person responsible for or connected with the activities or any other associated person having relevant information;
  • The inspecting officer is having power to obtain authenticated copies of documents, books, accounts from any person having control or custody of such documents, books or accounts;

• The inspecting officer shall submit a report to the Board on completion of the investigation.The Inspecting officer may submit a interim report at the instance of the Board;
• The Board may after consideration of the inspection report and after giving reasonable opportunity to the person concerned-

• Require to delist units from the stock exchange and surrender the certificate of registration;
• Require the InvIT to wind up;
• Require the InvIT to sell its assets;
• Require to take such actions as may be in the interest of the investors;
• Prohibit the InvIT or parties to the InvIT from operating in the capital market or from accessing the capital market for a specified period.

Power to issue clarification

Regulation 33 provides that in order to remove any difficulties in the application or interpretation of these regulations, the Board may issue clarifications or guidelines in the manner as may be appropriate.

Action in case of default

An InvIT or parties to the InvIT or any other person involved in the activity of the InvIT who contravenes any of the provisions of the Act or these regulations or notifications, guidelines, circulars or instructions issued by the Board shall be liable for one or more actions specified therein, including any action provided under the SEBI (Intermediaries) Regulations, 2008.