The infrastructure sector is a key driver for any economy. Among the many avenues of financing large-scale investments in infrastructure, including mergers and acquisitions, private equity investments and capital raising, setting-up and establishing infrastructure investment trusts (“InvITs”) has begun to gain traction with developers of infrastructure projects, including by public sector undertakings, to enable them to monetise their assets and undertake further infrastructure development. In the last few months, an increasing interest has also been evinced by large private equity firms, development institutions and multilateral and bilateral financial institutions in not only investing in the units of InvITs, but also in setting-up InvITs either on their own or jointly with Indian developers due to the yields offered by InvITs and the favourable and welcome changes to the tax regime applicable to InvITs, including unlisted InvITs.

The regulations and law applicable to InvITs is also evolving, with the growing need for infrastructure and the Governments increased focus on sustained development of infrastructure in India. A few of the recent regulatory developments include investment by various institutional investors in the units of InvITs, the introduction of the regime for unlisted InvITs, induction of sponsors, declassification of a sponsor, change in the eligibility criteria for an investment manager, guidelines on further issuances by listed InvITs.

While the product continues to evolve, it is important to first understand the fundamental structure of an InvIT and the functions, roles and responsibilities of each of the parties to an InvIT as specified under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 (the “SEBI InvIT Regulations”).

An InvIT, is a private trust set-up under the Indian Trusts Act, 1882, and registered with SEBI as an InvIT. The key parties to an InvIT include:

1. The Sponsor – A company, limited liability partnership or body corporate, which is the settlor and author of the trust and designated as the ‘sponsor’ of an InvIT.
2. The Trustee – An independent debenture trustee registered with SEBI and responsible for holding the InvIT assets in trust for, and for the benefit of, the unit holders of the InvIT.
3. The Investment Manager – A company, limited liability partnership or body corporate, which is responsible for the day-to-day management of the InvIT and its activities.
4. The Project Manager – A company, limited liability partnership or body corporate, which is responsible for the execution and management of the project assets held by the InvIT.

The SEBI InvIT Regulations, prescribe, distinctly the roles, responsibilities, and duties of each of the Sponsor, the Trustee, the Investment Manager, and the Project Manager of an InvIT. Some of these key roles, responsibilities, and duties are mentioned below:

• The Trustee is essentially the entity that holds the assets of the InvIT, in trust for the benefit of the unitholders. The Trustee’s key roles, responsibilities, and duties include, appointment of, and overseeing the activities of the Investment Manager and the Project Manager, ensuring compliance with the SEBI InvIT Regulations, entering into agreements on behalf of the InvIT, declaring distributions by the InvIT and reviewing any investor complaints.

• The Sponsor is the author of the InvIT and is responsible for transferring or undertaking to transfer the initial portfolio of assets to the InvIT and is responsible for the formation transactions involved in setting-up and establishing an InvIT. Further, the Sponsor of an InvIT is subject to certain lock-in requirements in respect of the units held by it. Simply explained, the Sponsor is required to lock-in 15% or 25% (as the case may be) of the outstanding units of an InvIT, held by it, for a period of three years and any additional unitholding for a period of one year. The board of directors of the Sponsor is also required to sign the offer document, pursuant to which an InvIT undertakes issuance of its units.

The Sponsor of an InvIT is not like the promoter of a company. The role and obligation of a Sponsor of an InvIT is limited to formation of the InvIT and the lock-in restrictions at the time of the InvIT undertaking an initial offer. The roles and obligations of a promoter of a company are ongoing, and not limited to the formation of a company and the lock-in restrictions at the time of undertaking the initial public offering by the company. The promoters of a company have both civil and criminal liability for disclosures in the offer document unlike the sponsor of an InvIT. The role of the promoter includes handling the day-to-day functioning of the company and the liability attached to the same under various laws, including the Companies Act, 2013, whereas the role of the sponsor is limited to sale of the assets to the InvIT.

Until recently, no other unitholder in an InvIT, other than the Sponsor, its associates and related parties were permitted to hold more than 25% of the unit capital of a listed InvIT. SEBI has, in June, 2020, permitted unitholders other than the Sponsor, its associates and related parties to hold 25% or more of the unit capital of a listed InvIT, subject to unitholder approval and certain processes as prescribed. SEBI has also provided for the conditions and process to be followed to declassify any entity as a ‘sponsor’ of an InvIT.

• The Investment Manager is responsible for undertaking investment decisions on behalf of the InvIT, managing the InvIT assets, undertaking or initiating activities related to the general functioning of the InvIT (such as unitholder meetings, unitholder grievance redressal, issuance of capital by an InvIT) and ensuring on-going compliance with the SEBI InvIT Regulations. In practice, the Trustee delegates almost of all its roles and responsibilities to the Investment Manager and is effectively responsible for the day-to-day operations of the InvIT. Additionally, the Investment Manager is also entrusted with the responsibility of ensuring that the activities of the InvIT are carried out in the best interests of the unitholders. Accordingly, even if the Sponsor is seen to ‘own and control’ an InvIT through its unitholding, it is the Investment Managers’ responsibility to ensure that the interest of other unitholders is protected.

The SEBI InvIT Regulations recognise the importance of the role of the Investment Manager to an InvIT and encourage the Investment Manager to act independently by imposing stricter governance norms on the Investment Manager, including having a majority independent board of directors.

The role of the Investment Manager is analogous to the board of directors of a company and its promoter. The Investment Manager, like a promoter and the board of directors of a company, is responsible for itself and the InvIT in respect of compliance with the SEBI InvIT Regulations and the ongoing disclosures by the InvIT.

• The Project Manager is responsible for the execution of an infrastructure project and achieving project milestones in accordance with the project documents or concession agreements. It is also responsible for the continuous operations and management of the project assets held by the InvIT through a special purpose vehicle. The project manager is akin to an EPC or O&M contractor for any infrastructure project with additional accountability owed to the InvIT under the SEBI InvIT Regulations.
  

Since 2014, India has seen five listed InvITs, one unlisted InvIT and two listed REITs in the market. InvITs have now established themselves not only as an optimum and efficient option for financing the infrastructure sector of the Indian economy, but also an investment option that is seriously being considered by marque domestic and foreign investors. To ensure that the traction and interest in InvITs continues, the Government has encouraged all stakeholders to highlight any practical challenges and provide suggestions that would continue to make InvITs an attractive investment option. Most of these suggestions have been considered favourably, without losing sight of its most important aim – protecting investors’ interest. The Government of India (through various ministries, regulators and SEBI), continues to incentivise infrastructure developers to set-up and establish InvITs, while encouraging participation by investors, including retail investors, in the growth story of India’s infrastructure sector through efficient tax regimes.