Draft SEBI Infrastructure Investment Trusts Regulations for public comments

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The Securities and Exchange Board of India (SEBI) seeks to introduce Infrastructure Investment Trusts (InvITs), a modified Real Estate Investment Trusts (REITs) type structure for investment projects …

The Securities and Exchange Board of India (SEBI) seeks to introduce Infrastructure Investment Trusts (InvITs), a modified Real Estate Investment Trusts (REITs) type structure for investment projects in India. InvITs broadly aim at providing wider and long-term re-finance for existing infrastructure projects, releasing developer capital for re-investment, replacing existing high cost debt with long-term low-cost capital and helping banks free up/reduce loan exposure.

Towards this end, draft SEBI (Infrastructure Investment Trusts) Regulations 2014 have been released and are up for public comments upto 24 July 2014

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  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Draft SEBI Infrastructure Investment Trusts Regulations for public comments 21 July 2014 Background Infrastructure is a cornerstone of development for any country. According to the Twelfth Five Year Plan, India requires an investment of around INR65 lakh crore in the infrastructure sector during 2012-2017. As can be derived, a significant investment boost is expeditiously required in the infrastructure sector to help India achieve its target for the Twelfth Five Year Plan. As the capital market regulator, the Securities and Exchange Board of India (SEBI) has actively sought to set-up varied frameworks to facilitate financing and investment in the infrastructure sector. Based on various suggestions received by stakeholders, SEBI introduced a concept paper on Infrastructure Investment Trusts (InvITs) on 20 December 2013. In the budget for Financial Year (FY) 2014-15, identifying the needs and requirement of the infrastructure sector, the Finance Minister announced the introduction of InvITs in India to reduce the pressure on the banking system, while also making available fresh equity for infrastructural projects. Based on the comments received on the consultative paper and the budget announcement, a separate regulatory framework under the draft SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations) is being proposed for introducing InvITs in India. The draft regulations are up for public comments upto 24 July 2014. Salient features of the draft InvIT Regulations are as under: 1. Broad structure of the InvIT  The InvIT shall be set up as a Trust to be registered with SEBI.  The key parties in an InvIT structure would comprise (i) trustee (ii) sponsor (iii) investment manager, and (iv) project manager.
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The InvIT may raise capital through units issued inter alia under private placement and/or initial/follow on offer, depending upon stipulated conditions. Irrespective of the mode of capital raise, units of all InvITs must be mandatorily listed in India. InvITs may also raise debt (subject to limits).  The InvIT shall invest in infrastructure 1 projects, either directly or through a Special Purpose Vehicle (SPV), in accordance with stipulated conditions. 2. Key investment conditions Common conditions applicable to all InvITs  Investment by an InvIT shall only be in SPVs or eligible infrastructure projects (directly or through SPVs), or in eligible securities in India. − The SPV shall either be a company or a Limited Liability Partnership (LLP): (i) in which the InvIT holds or proposes to hold controlling 2 interest and atleast 51 per cent of the equity share capital or interest (ii) which holds not less than 90 per cent of its assets directly in infrastructure projects (iii) does not invest in other SPVs; and (iv) which is engaged only in activities pertaining and incidental to underlying infrastructure projects. In case of Public Private Partnership (PPP) projects, the InvIT shall mandatorily invest through SPVs. − Eligible infrastructure projects are defined to mean: (i) in case of PPP projects, the infrastructure project is ‘completed and revenue generating’ 3 or the infrastructure project is a ‘pre-COD project’ 4 ; and (ii) in case of non-PPP projects, the infrastructure project has received all requisite approvals and certifications for commencing construction and has been rated by a credit rating agency. ___________________ 1 Infrastructure sector is defined to mean all infrastructure sub-sectors as defined by the Cabinet Committee on Infrastructure vide notification of the Ministry of Finance dated 1 March 2012 including any amendments thereto 2 Controlling interest means an interest, whether direct or indirect, to the extent of more than 50 per cent of voting rights or interest. 3 ‘Completed and revenue generating project’ is an infrastructure project, which prior to acquisition by the InvIT: (i) has achieved the commercial operations date; (ii) has received all the requisite approvals and certifications for commencing operations; (iii) the underlying infrastructure project has been capitalised in the books of the SPV; and (iv) the project has been generating revenue from operations for a period of at least one year. 4 ‘Pre-COD project’ is an infrastructure project, which: (i) has not achieved commercial operation date; (ii) has achieved at least 50 per cent of the construction of the infrastructure project, or expended at least 50 per cent of the total capital cost.  An InvIT shall invest in atleast two infrastructure projects.  Value of proposed holding of the InvIT in underlying assets cannot be less than INR500 crore.  No minimum or maximum monetary limits have been specified for investments in any individual infrastructure project/SPV.  An InvIT shall not invest in units of other InvITs.  Three year lock in on transfer of any infrastructure asset (held directly or through a SPV) from the date of purchase of such assets by the InvIT (other than investment in securities of companies in infrastructure sector). Additional conditions for publicly offered InvITs (ie: retail):  A publicly offered InvIT shall invest at least 80 per cent of the value of its assets in completed and revenue generating infrastructure projects.  Balance up to 20 per cent of the value of assets may be invested in: (i) under- construction eligible infrastructure projects (directly or through SPVs) subject to a cap of 10 per cent of the value of the assets; (ii) listed or unlisted debt of companies or body corporate in the infrastructure sector (excluding debt investment in SPVs); (iii) listed equity shares of companies, which derive at least 80 per cent of their operating income from the infrastructure sector; (iv) government securities; and (v) money market instruments, liquid mutual funds or cash equivalents. Additional conditions for privately placed InvITs (i.e.: institutional):  A privately placed InvIT shall mandatorily hold at least: (i) one completed and revenue generating project, and (ii) one pre-COD project.  Apart from the above, privately placed InvITs shall invest only in eligible infrastructure projects or securities of companies or partnership interests of LLPs, which derive not less than 80 per cent of their operating income from the infrastructure sector.
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Un-invested funds may be invested in liquid funds, government securities, money market instruments or cash equivalents. 3. Offer of units to the public and listing of units Publicly Offered InvITs (retail)  If any InvIT intends to hold not less than 80 per cent of assets in completed and revenue generating infrastructure projects, initial issue of units shall be by way of initial offer only to the public for subscription (including through offer for sale). Subsequent issue of units after initial offer may be through follow on offer, preferential allotment, qualified institutions placement etc.  Minimum investment by any investor to be at least INR5 lakh.  Value of units proposed to be offered to the public in an initial offer shall be at least 25 per cent of the value of the InvIT.  Price determination may be through book building or any other prescribed process.  Units shall be issued to not less than 20 investors, whether Indian or foreign, each holding not more than 25 per cent of the units of the InvIT.  Units shall be mandatorily listed on the stock exchange within 12 working days from the date of the closure of initial offer. The trading lot for the purpose of trading on the designated stock exchange shall be INR5 lakh. Privately Placed InvITs (institutional)  If any InvIT intends to invest more than 10 per cent of the value of the InvIT assets in under- construction projects, it shall raise funds by way of private placement only.  Private placements may be made only to qualified institutional buyers and body corporates, as defined.  Minimum investment by any investor to be at least INR1 crore.  Units shall be issued to not less than five investors and not more than 1,000 investors. Further, each investor shall hold not more than 25 per cent of the units of the InvIT.  Units shall be mandatorily listed within 30 working days from the date of final closing. The trading lot for the purpose of trading on the designated stock exchange shall be INR1 crore. Common conditions  The initial offer size shall be at least INR250 crore.  No schemes shall be launched under the InvIT.  Units may be offered to both residents and non-residents (subject to exchange control norms).  Minimum public holding shall be at least 25 per cent of the outstanding units of the InvIT at all times.  Any person (other than sponsor) holding units of the InvIT prior to initial offer shall hold the units for atleast one year from the date of listing of the units.  All unit holders of the InvIT shall enjoy equal voting or any other rights, and there shall be no multiple classes of units of InvITs.  InvIT must offer units within three years from registration date (subject to permissible extensions).  Offer document/placement memorandum needs to comply with requisite disclosure norms etc. 4. Key eligibility criteria/responsibilities for the sponsor, investment manager, project manager and trustee of an InvIT Sponsor:  Sponsor should have a minimum net worth of INR10 crore if it is a body corporate or a company, or net tangible assets of at least INR10 crore in case of a limited liability partnership. In case of PPP projects, the net worth/net tangible assets shall be as defined in the project documents.
  • 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Sponsor should have a sound track record in the development of infrastructure or fund management in the infrastructure sector i.e. at least five years of experience, and where the sponsor is a developer, at least two projects that have achieved financial closure.  Sponsor should hold at least 25 per cent of the total units of the InvIT after initial issue of units on a post-issue basis.  The minimum holding of 25 per cent of the sponsor will be locked in for three years from the date of listing of such units. If the sponsor proposes to sell the units below 25 per cent after three years from the date of listing, it shall arrange for any other person/entity to act as the re-designated sponsor. Further, the proposed buyer shall provide an option to exit to the unit holders in accordance with prescribed guidelines.  Sponsor shall transfer or undertake to transfer 100 per cent of its shareholding interest in the SPV or ownership of infrastructure project to the InvIT subject to any mandatory holding of shares/interest in the SPV required as per applicable law. Investment manager:  Investment Manager should have a minimum net worth of INR5 crore if it is a body corporate or a company, or net tangible assets of at least INR5 crore in case of a limited liability partnership.  Investment Manager should have at least five years of experience in fund management/advisory services/development in the infrastructure sector.  Investment Manager should have minimum two employees in its investment committee with five years of experience in fund management/advisory services/development in the infrastructure sector, and at least one employee with five years of experience in the relevant sub-sector(s) in which the InvIT proposes to invest.  Numerous responsibilities are cast on the investment manager including investment/exit decision making, oversight over the project manager, securing proper legal title/contract enforceability on behalf of the InvIT/SPV, issuance and listing of units, distributions to unit holders, managing conflicts of interest/disclosure/reporting requirements, compliance with valuation requirements, submissions to trustees, Net Asset Value (NAV) declaration etc. Project manager:  The Project Manager shall be responsible for project execution, and in case of PPP projects, the entity responsible for execution and achievement of project milestones in accordance with the concession agreement (i.e. the concessionaire SPV).  Project Manager shall undertake operations and management of the InvIT assets, and in case of under construction projects, oversee the progress of development, approval status, and other aspects of the project.  Project Manager may ensure revision of the concession agreement, if required for the purpose of compliance with the provisions of these regulations. Trustee:  Trustee should either be: (i) registered with SEBI, not being an associate of the sponsor/Investment Manager; or (ii) an associate company of the sponsor/Investment Manager, having at least 50 per cent of its directors as independent and not related parties to the InvIT.  Trustee should not be a trustee of any other InvIT or an alternative investment fund engaged in the infrastructure sector.  Various responsibilities have been cast on the trustee including oversight over activities of the investment manager. 5. Distributions/pay-outs/buy-backs  At least 90 per cent of the net distributable income after tax of the SPV shall be distributed to the InvIT in proportion to its holding in the SPV.
  • 5. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  All related party transactions of the InvIT shall be disclosed in (i) the offer document/placement memorandum; and (ii) to the designated stock exchange and unit holders periodically.  In case of publicly offered InvITs, approval of the unit holders shall be required prior to entering into related party transactions in certain circumstances. 9. Other key aspects  Rights of investors in specified matters (like change in investment manager, change in investment strategy of the InvIT, any issue of units after initial offer by a publicly offered InvIT, etc.) wherein approval of investors are required have been specified.  Detailed disclosure norms have been specified (including mandatory disclosure requirements in the offer document, valuation report, annual and half yearly report).  The regulations specify various circumstances in which the trustee shall apply for delisting of units of the InvIT including, the public float or the number of unit holders of the InvIT falling below the limits specified above, no projects/assets remaining under the InvIT for not more than six months, and InvIT proposes to invest in no projects in the future, etc. Our comments In principle, InvITs are a welcome move and should particularly be relevant in case of infrastructure assets with stable cash flows such as road projects, fixed PPA power projects in the renewable space (wind, solar and hydro) etc. For InvITs to be a success, apart from finalisation of these regulations, the government has to ensure that other regulations are aligned to enable a more vibrant and developed InvIT market in India. These include amendments in:  Taxation laws viz. reducing the period of holding of units for gains to be qualified as long-term capital gains from 36 months to 12 months, not disentitling the sponsor for any carry forward of losses on transfer of shares of the SPV/infrastructure project to the InvIT, tax deferral benefit to the sponsor to be extended to direct transfer of infrastructure asset to the InvIT in exchange of units, pre-transfer M&A also to be made tax neutral, etc.  At least 90 per cent of the net distributable income after tax of the InvIT shall be distributed to the unit holders.  Distributions to be made at least once every quarter for publicly offered InvITs, and once every six months for privately placed InvITs.  In case of any asset sale of the InvIT, the sales proceeds may be re-invested or distributed to units holders, as above.  InvIT shall not redeem units other than by way of a buy-back in accordance with guidelines to be specified, or at the time of delisting. 6. Borrowings and deferred payments  Aggregate consolidated borrowings and deferred payments of the InvIT have been capped at 49 per cent of the value of the InvIT assets.  If the same exceeds 25 per cent of the InvIT assets, credit rating from SEBI registered credit rating agency and approval of unit holders would be required. 7. Valuation of assets  Full valuation, including a physical inspection of the properties should be carried out at least once every financial year (with every six monthly updation in the valuation for publicly offered InvITs).  Prior to any issue of units by offered InvIT other than the bonus issue, full valuation of the InvIT’s assets is required.  For any transaction of purchase or sale of infrastructure projects, whether directly or through SPVs for publicly offered InvITs, full valuation to be undertaken and the transaction shall not be less than 90 per cent/not more than 110 per cent of the assessed value of the property for sale/purchase of infrastructure projects respectively. 8. Related party transactions  All related party transactions to be on arm’s length basis in the best interests of the unit holders, consistent with the strategy and investment objectives of the InvIT.
  • 6. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  One time waiver of stamp duty on transfer of shares of the SPV/infrastructure project by the sponsor to the InvIT.  Amendment in exchange control regulations to permit foreign investment in units of InvITs, and for InvITs to raise foreign currency loans/bonds.  Amendment in PPP policy to facilitate movement of shares of SPV/infrastructure projects to the InvIT without adversely impacting PPP agreement/terms, and continuing the benefits/concessions to the infrastructure projects post transfer to the InvITs.
  • 7. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010