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

[Mr. M. GOVINDARAJAN]

Chapter III of the Regulations deals with the rights and responsibilities of parties to InvIT, valuer and auditor.   The parties to the InvIT are the trustee, investment manager, project manager and sponsor(s).  In this part the records to be maintained by the investment manager and trustee are also discussed.  The rights and meeting of the unit holders are also discussed.

Rights and responsibilities of trustee

Regulation 9 provides the rights and responsibilities of the trustee.   The trustee is-

• to hold the InvIT assets in the name of the InvIT for the benefit of unit holders in accordance with the trust deed and these regulations;
• to enter into an investment agreement with the investment manager on behalf of the InvIT;
• to oversee the activities of-

• the investment manager in the interest of the unit holders, ensure that the investment manager complies with regulations and obtain compliance certificate from the investment manager in the prescribed form on a quarterly basis;
• the project manager other than that relating with revenue streams from the projects with respect to compliance with these regulations and the project management agreement and shall obtain compliance certificate from the Project Manager, in the prescribed form on a quarterly basis;

• to ensure that the investment manager complies with reporting and disclosure requirements in accordance with these regulations and in case of any delay or discrepancy require the investment manager to rectify the same on an urgent basis;
• to review the transactions carried out between the investment manager and its associates and where the investment manager has advised that there may be a conflict of interest, shall obtain confirmation from a practicing Chartered Accountant that such transaction is on arm’s length basis;
• to review periodically the status of unit holders’ complaints and their redressal undertaken by the investment manager;
• to make distributions and ensure that investment manager makes timely distribution to the unit holders;
• to require the investment manager to submit such reports as may be necessary for the effective monitoring of the functioning of the InvIT;
• to ensure that the subscription amount is kept in a separate bank account in the name of InvIT and to utilize for adjustment against allotment of units or refund of money to the applicants till the time such units are listed;
• to ensure that the remuneration of the valuer is not be linked to or based on the value of the assets being valued;
• to ensure that the investment manager convenes meetings of the unit holders not less than once every year and the period between such meetings shall not exceed 15 months;
• if it requires to take up any matter that has been approved in any meeting of the unit holders to the Board or with the designated stock exchanges;
• in case of any change in investment manager due to removal or otherwise, the trustee shall-

• obtain the approval from unit holders and from the Board;
• appoint the new investment manager within 3 months from the date of termination of the earlier investment management agreement;
• allow the existing investment manager at his discretion till the new investment manager is appointed;
• ensure that the new investment manager shall stand substituted as a party in all the documents to which the earlier investment manager was a party;
• ensure that the earlier investment manager continues to be liable for all its acts of omissions and commissions notwithstanding such termination;

• in case of any change in project manager due to removal or otherwise, the trustee shall-

• appoint the new project manager within 3 months from the date of termination of the earlier project management agreement;
• either suo motu, or on the advice of the concessioning authority appoint an administrator in connection with a infrastructure project(s) for such term and on such conditions as it deems fit;
• allow the existing project manager to continue at his discretion till such time the new project manager is appointed;
• ensure that all costs and expenses in this regard will be borne by the new project manager;
• ensure that the new project manager shall stand substituted as a party in all the documents to which the earlier project manager was a party;
• ensure that the earlier project manager continues to be liable for all its acts of omissions and commissions notwithstanding such termination;

• not to invest in units of the InvIT in which it is designated as trustee;
• to ensure that the activity of the InvIT is being operated in accordance with the provisions of the trust deed, these regulations and the offer document or placement memorandum and if any discrepancy is noticed to inform the same to the Board immediately in writing;
• to furnish information to the Board and the designated stock exchanges such information pertaining to the activity of the InvIT;
• to inform the Board in case any act which is detrimental to the interest of the unit holders is noted.

Regulation 26(2) provides that the trustee shall maintain records pertaining to-

• certificate of registration granted by the Board;
• registered trust deed;
• documents pertaining to application made to the Board for registration as an InvIT;
• titles of the infrastructure assets;
• notices and agenda send to unit holders for meetings held;
• periodical reports and disclosures received from the investment manager;
• disclosures, periodically or otherwise, made to the Board, unit-holders and the designated stock exchanges;
• any other material documents.

Rights and responsibilities of investment manager

Regulation 10 provides for the rights and responsibilities of investment manager.  The investment manager shall-

• make the investment decisions to the underlying assets or projects including any further investment or divestment of the assets;
• oversee activities of the project manager to revenue streams from the project and project management agreement and shall obtain compliance certificate from the project manager in the prescribed form on a quarterly basis;
• ensure that the infrastructure assets of the InvIT or SPV have proper legal titles, if applicable, and that all the material contracts entered into on behalf of InvIT or SPV are legal, valid, binding and enforceable by and on behalf of the InvIT or SPV;
• ensure that the investments made are in accordance with the investment conditions and investment strategy;
• appoint, in consultation with trustee, the valuer(s), auditor, registrar and transfer agent, merchant banker, custodian and any other intermediary or service provider or agent in a timely manner;
• appoint auditor for a period of not more than 5 consecutive years;
• arrange for insurance coverage for the assets;
• ensure about the adequate infrastructure and sufficient key personnel with adequate experience and qualification to undertake management of the InvIT at all times;
• responsible for issue of units and listing of units including-

• filing of placement memorandum with the Board;
• filing the draft and final offer document with the Board and the exchanges within the prescribed period;
• dealing with all matters up to allotment of units to the unit holders;
• obtaining in-principal approval from the designated stock exchanges;
• dealing with all matters relating to issue and listing of the units;

• ensure that disclosures made in the offer document or placement memorandum contains material, true, correct and adequate disclosures and are in accordance with these regulations and guidelines or circulars issued hereunder;
• declare distributions to the unit holders;
• review the transactions carried out between the project manager and the associates and where the project manager has advised that there may be a conflict of interest, shall obtain confirmation from the auditor that such transaction is on arm’s length basis;
• ensure adequate and timely redressal of unit holders’ grievances;
• ensure that the disclosures or reporting to the unit holders, Board, trustees and designated stock exchanges, are in accordance with these regulations and guidelines or circulars issued;
• provide to the Board and the designated stock exchanges the information as required by them;
• not to obtain any commission or rebate or any other remuneration arising out of transactions other than specified in the offer document or placement memorandum or any other document as may be specified by the Board for the issue of units;
• ensure that the valuation of the InvIT assets is done by the valuer(s);
• submit to the trustee-

• quarterly reports on the activities including the receipt for all funds and payments made, position on compliance with these regulations, performance report, status of the development of under-construction projects, within 30 days of end of such quarter;
• valuation report within 15 days of the receipt of the valuation report from the valuer;
• decision to acquire or sell or develop or bid for any asset or project or expand existing completed assets or projects along with rationale for the same;
• details of any action requires approval from the unit holders;
• details of change in its directors, change in its shareholding, any legal proceedings that may have a significant bearing on the activity within 7 working days of such action;

• ensure that computation and declaration of NAV on the valuation done by the value not later than 15 days from the date of valuation;
• ensure that the audit of accounts by the auditor is done not less than twice annually and such report is submitted to the stock exchanges within 45 days of the half year endings;
• appoint a custodian as may be authorized by trustee;
• place before the Board of Directors on activities and performance at least once every quarter within 30 days of end of every quarter;
• designate an employee or director as a compliance officer for monitoring of compliance with these regulations and intimate the Board in case any non compliance;
• convene meetings of the unit holders and maintain records;
• ensure that the all the activities of the intermediaries or agents or service providers are in accordance with the regulations.

Regulation 26(1) provides for the maintenance of records by investment manager as detailed below-

• all investments and divestments and documents supporting the same including rationale for such investments or divestments;
• agreements entered into by the InvIT or on behalf of the InvIT;
• documents relating to appointment of persons;
• insurance policies for infrastructure assets;
• investment management agreement;
• documents pertaining to issue and listing of units including placement memorandum, draft and final offer document, in principle approval by designated stock exchanges, listing agreement with the designated stock exchanges, details of subscriptions, allotment of units, etc.,
• distributions declared and made to the unit-holders;
• disclosures and periodical reporting made to the trustee, Board, Unit holders and the designated stock exchanges including annual reports, half yearly reports etc.,
• valuation reports including methodology of valuation;
• books of accounts and financial statements;
• audit reports;
• reports relating to activities placed before the Board of Directors;
• unit-holders’ grievances and actions taken thereon including copies of correspondences made with the unit-holder and the Board, if any;
• any other material documents.

Responsibilities of Project Manager

Regulation 11 provides for the responsibilities of project manager.   The project manager shall-

• undertake operations and management of the InvIT assets including making arrangements for the maintenance either directly or through appointment and supervision of agents as required under project agreement including a concession agreement;
• if the InvIT invests in under construction projects-

• undertake the operations and management of the projects, either directly or through agents;
• oversee the progress of development, approval status and other aspects of the projects up to its completion;

• discharge all obligations in respect of achieving timely completion of the infrastructure project, implementation, operation, maintenance and management of the  project in terms of project management agreement.

Rights and responsibilities of sponsor(s)

Regulation 12 provides for the rights and responsibilities of sponsor.  The sponsor(s) shall-

• set up the InvIT and appoint the trustees;
• transfer or undertake to the InvIT the entire shareholding or interest in the SPC or ownership of the infrastructure projects, subject to a binding agreement and adequate disclosures in the offer document or placement memorandum, prior to allotment of units;
• hold together not less than 25% of the total units after initial offer on a post issue for a period of not less than 3 years from the date of listing of such issues;
• in case of PPP projects, in case such acquiring or holding is disallowed by government or under any provisions of the concession agreement or any other such agreement-

• may continue to maintain such holding at the SPV level;
• the consolidated value of all such holdings at the SPV level and the value of the units by the sponsor shall not be less than the value of 25% of the total units after initial issue of units on a post issue basis;
• in case such holding of sponsor in the SPV results innot having controlling interest and not having more than 50% shareholding or interest in the SPV, the sponsor shall enter into a binding agreement to ensure that decisions taken by the sponsor including voting with respect to SPV are in compliance with these regulations and not against the interest of the InvITs or the unit holders and shall be subject to further guidelines as may be specified by the Board;

• any holding by sponsor exceeding 25% on a post issue basis, shall be held for a period of not less than one year from the date of listing of such units.

Rights and responsibilities of the valuer

Regulation 13(1) provides for the rights and responsibilities of the valuer.   The value shall comply with the following conditions at all times-

• to ensure that the valuation of assets is impartial, true and fair and is in accordance with these regulations;
• to ensure adequate and robust internal controls to ensure the integrity of its valuation reports;
• to ensure that it has sufficient key personnel with adequate experience and qualifications to perform valuations;
• to ensure that it has sufficient financial resources to enable it to conduct its business effectively and meet its liabilities;
• not to invest in units or assets being valued and sell assets or units held prior to being appointed as valuer till the time such time such person is designated as valuer and not less than 6 months after ceasing to be valuer;
• conduct valuation with transparency and fairness and to render high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment;
• act with independence, objectivity and impartiality in performing the valuation;
• discharge its duties in an efficient and competent manner, utilizing the knowledge, skills and experience in the possible way to complete given assignment;
• not to accept remuneration, in any form, for performing the valuation of the assets from any person other than the InvIT or its authorized representative;
• before accepting any assignment to disclose to the InvIT any direct or indirect consideration which the valuer may have in respect of such assignment;
• to disclose any pending business transactions, contracts under negotiation and other arrangements with the investment manager or any other party whom the InvIT is contracting with and any other factors that may interfere with the valuer’s ability to give an independent and professional valuation of the assets;
• not to make false, misleading or exaggerated claims in order to secure assignments;
• not to provide misleading valuation, either by providing incorrect information or by withholding relevant information;
• not to accept an assignment which interferes with its ability to do fair valuation;
• prior to performing a valuation acquaint with all laws and regulations relevant to such valuation.

Responsibilities of the auditor

Regulation 13(2) provides the responsibilities of the auditor.   The auditor shall-

• conduct audit of accounts and draft the audit report based on the accounts examined by him and after taking into account the relevant accounting and auditing standards, as may be specified by the Board;
• to the best of his information and knowledge, ensure that the accounts and financial statements give a true and fair view of the state of the affairs of the InvIT, including profit or loss and cash flow for the period and such other matters as may be specified;
• have a right of access at all times to the books and accounts and vouchers pertaining to activities of the InvIT;
• have a right to require such information and explanation pertaining to activities of the InvIT as he may consider necessary for the performance of his duties and as auditor from the employees or parties or SPV or any other person in possession of such information.

Rights and meetings of unit holders

Regulation 22 provides for rights and meetings of unit holders.  The unit holders are entitled to receive income or distribution as provided for in the offer document or placement memorandum.

In any matter which requires the approval of the unit holders-

• a resolution shall be considered as passed when the votes cast by unit holders in favor of the resolution exceed a certain percentage as specified in these regulations, of votes cast against;
• voting may be done by postal or by electronic mode;
• a notice not less than 21 days shall be provided to the unit holders;
• voting by any person who is a related party in such transaction as well as associates of such person(s) shall not be considered on the specific issue;
• investment manager is responsible for conducting such meeting subject to overseeing by the trustee;

With respect to publicly offered InvITs-

• an annual meeting of the unit holders shall be held not less than once a year within 180 days from the end of the financial year and the time between two meetings shall not exceed 15 months;
• in respect of annual meeting-

• any information which is required to be disclosed and require approval of the unit holders may be taken up in the meeting including-

• latest annual accounts and performance of the InvIT;
• approval of auditor and fees of such auditor as may be required;
• latest valuation reports;
• appointment of valuer, as may be required;
• any other issue.

• for any issue taken up in such meetings that requires approval of the unit holders, votes cast in favor of the resolution shall not be less than one and half times the votes cast against the resolution.

• in any case of-

• approval required for investment conditions and dividend policy; related party transactions and valuation of assets;
• any transaction, other than any borrowing, value of which is equal to or greater than 25% of the assets;
• any borrowing in excess of specified limit for borrowing and deferred payments;
• any issue of units after initial offer by a publicly offered in whatever form other than any issue of units which may be considered by the Board;
• increasing period for compliance with investment conditions to one year;
• any issue which in the opinion of the sponsor(s) or trustee or investment manager is material and require the approval of unit holders, if any;
• any issue for which the Board or the designated stock exchanges requires such approval

shall be required where votes cast in favor of the resolution shall not be less than one and half times the votes cast against the resolution.

• in case of-

• any change in investment manager;
• any material change in investment strategy or in the management fees;
• delisting of units;
• any issue, not in the ordinary course of business, which in the opinion of the sponsor(s) or investment manager or trustee requires approval of the unit holders; if approval is not obtained the person shall provide an exit option to the unit holder to the extent and in the manner specified by the Board;
• any issue for which the Board or the designated stock exchange requires approval;
• any issue taken up on request of the unit holders including-

• removal of the investment manager and appointment of another investment manager;
• removal of the auditor and appointment of another auditor;
• removal of the valuer and appointment of another valuer;
• delisting of the units, if the unit-holders have sufficient reason to believe that such delisting would act in the interest of the unit-holders;
• any issue which the unit holders have sufficient reason to believe that is detrimental to the interest of the unit holders;
• change in the trustee if his action is detrimental to the interest of the unit holders

approval from unit holders shall be required where vote cast in favor of the resolution shall not be less than 3 times of the votes cast against the resolution.