The Securities and Exchange Board of India (“SEBI”), vide notification dated May 27, 2024, issued the Securities and Exchange Board of India (Infrastructure Investment Trusts) (Amendment) Regulations, 2024 (“Amendment Regulations”) to amend the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) which sets out the framework for registration and regulation of Infrastructure Investment Trusts (“InvIT”).

By way of the Amendment Regulations, SEBI has made the following changes to the InvIT Regulations:

1. introduction of a framework for issuance of subordinate units i.e., instruments issued by an InvIT that can be reclassified as an ordinary unit (“Subordinate Units”), which along with other provisions of the InvIT Regulations, shall govern the Subordinate Units;
2. Subordinate Units shall neither be considered in computing the total outstanding units of the InvIT for the purposes of calculating the minimum unitholding requirement of the sponsor(s) and sponsor group(s) nor be eligible for meeting such minimum unitholding requirement, as mentioned in Regulations 12(3) and (3A) of the InvIT Regulations;
3. InvITs shall have only one class of units and all units shall carry equal voting rights and distribution rights associated with such units (save and except Subordinate Units, which will not carry any voting or distribution rights); and
4. Unitholder(s) holding not less than 10% (ten percent) of the total outstanding units of the InvIT, either individually or collectively will be entitled to:

a. nominate one director on the board of directors of the investment manager, who would need to recuse from voting on transactions where such nominee director or associate of such nominee director or the unitholder who nominated such nominee director or associate of such unitholder is a party; and

b. comply with stewardship code specified in Schedule VIII of the InvIT Regulations.

Some of the key provisions of the framework for issuance of Subordinate Units are as follows:

Issuance of Subordinate Units

Issuance of Subordinate Units

1. The Subordinate Units shall be issued:

a. in dematerialised form with a distinct International Securities Identification Number (“ISIN”) from that of ordinary units, only by privately placed InvITs upon acquisition of an infrastructure project;

b. only to the sponsor, its associates, and the sponsor group of the InvIT and be deemed to be a part of the consideration for acquisition of the infrastructure project from such sponsor, its associates, and the sponsor group; and

c. by way of an initial offer or any offer after the initial offer, either along with the issue of ordinary units or without the issue of ordinary units, however, an issuance to be made after the initial offer by the InvIT shall require the approval of the unitholders, in a manner such that the votes cast in favour of the resolution shall not be less than one and a half times the votes cast against the resolution. Further, any unitholder who is party to the acquisition of the infrastructure project including the sponsor, its associates and sponsor group, shall not be entitled to vote.

2. The price of Subordinate Units shall be determined according to the pricing guidelines applicable for issuance of ordinary units.
3. The enabling provisions authorizing the issuance of Subordinate Units shall be specified in the trust deed.
4. The amount of Subordinate Units issued at the time of acquisition of an infrastructure project by the InvIT shall not exceed 10% (ten percent) of the acquisition price of the infrastructure project.
5. The total number of outstanding Subordinate Units at any point of time shall not exceed 10% (ten percent) of the total number of outstanding ordinary units issued by such InvIT, however, an InvIT which has Subordinate Units outstanding exceeding the above limit, as on the date of notification of the Amendment Regulations, may issue additional Subordinate Units subject to compliance with the above limit. Further, for the purpose of compliance with the above limit, all outstanding Subordinate Units shall be considered including the Subordinate Units issued prior to the date of the notification of the Amendment Regulations.
6. The terms and conditions of the Subordinate Units shall not be varied after their issuance, except in accordance with the provisions of this framework.
7. Prior to issuance of Subordinate Units, the investment manager shall obtain in-principle approval from the recognised stock exchange for listing of such Subordinate Units after their reclassification into ordinary units.
8. No InvIT shall raise funds through public issue if any Subordinate Units have been issued and are outstanding.

Transfer of Subordinate Units

1. The Subordinate Units shall be locked in till their reclassification into ordinary units. Further, the Subordinate Units may be transferred to or encumbered in favour of, only the sponsor, its associates or the sponsor group entities.
2. In case of a change in the sponsor, the outgoing sponsor may transfer the Subordinate Units held by it, if any, to another sponsor, its associates, or the sponsor group.

Reclassification of Subordinate Units

Entitlement date and entitlement event

1. The entitlement date and the entitlement event for reclassification of subordinate units to ordinary units shall be clearly defined and specified in the term sheet.
2. The minimum time period between the issuance of Subordinate Units and entitlement date for reclassification of the Subordinate Units to ordinary units shall be 3 (three) years.
3. The entitlement date may be extended in the manner specified in the term sheet, subject to fulfilment of certain specified conditions.

Performance benchmark

1. The performance benchmark for reclassification of Subordinate Units to ordinary units shall be clearly defined and specified in the term sheet and shall be quantifiable, objective and based on the audited financial statements.
2. If the performance benchmark is achieved at the end of the entitlement date, including the extended period, if any, the Subordinate Units shall be reclassified, in part or in full, into equal number of ordinary units on a pari passu basis.
3. If the performance benchmark is not achieved at the end of the entitlement date, including extended period, if any, the Subordinate Units shall be extinguished without any payment to the holder of Subordinate Units.
4. The status of achievement of performance benchmark shall be certified by the statutory auditor of the InvIT for reclassification of Subordinate Units to ordinary units or extinguishment of the Subordinate Units, as the case may be, and shall be reviewed by the trustee and the audit committee of the investment manager.
5. The board of directors of the investment manager shall consider reclassification or extinguishment of the Subordinate Units depending on the achievement of the performance benchmark and pass a resolution making the necessary recommendation to this effect to the trustee. Thereafter, such recommendation for reclassification or extinguishment, shall be considered by the trustee and after ensuring compliance with the provisions of the InvIT Regulations, the trustee may approve the reclassification or extinguishment, and intimate the same to the investment manager, who in turn shall make the necessary intimation to the recognised stock exchange, depositories and the Registrar and Transfer Agent.
6. Upon receipt of the final listing and trading approval from the stock exchange(s), the reclassified ordinary units shall be listed on such stock exchange(s).

Disclosure Requirements

The following disclosures are required to be made by the investment manager of the InvIT in respect of the Subordinate Units, irrespective of such units being issued prior to or after the notification of the Amendment Regulations:

1. disclosure of terms and conditions governing the Subordinate Units in the term sheet;
2. disclosure of the impact of potential reclassification into ordinary units in the term sheet;
3. disclosure of the term sheet, the explanatory statement to the notice for unitholders meetings as well as any document that may be disclosed to investors including prospective investors, in the placement memorandum and on its website, as well as filing of the same with the stock exchange;
4. disclosure of any inter-se transfer or inter-se encumbrance of Subordinate Units to the recognized stock exchange within one working day of such transfer or encumbrance;
5. disclosure of the progress related to achievement of performance benchmark in the annual report of the InvIT;
6. disclosure of the diluted net asset value (“NAV”) i.e. ‘the value of the InvIT assets reduced by the external debt divided by the total number of outstanding ordinary units and Subordinate Units’ and the diluted distribution per unit i.e. ‘the value of total distribution, divided by the total number of outstanding ordinary units and Subordinate Units’, to the stock exchange along with NAV and distribution per unit till the time Subordinate Units are outstanding;

Please find a copy of the InvIT Regulations, here and the Amendment Regulations, here.

This update has been contributed by Aastha (Partner) and Arth Singhal (Associate).

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