Infrastructure Investment Trusts (InvITs)

Infrastructure Investment Trusts

InvIT - Background and framework

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Infrastructure Investment Trusts (InvITs) Background

Securities and Exchange Board of India (SEBI) issued draft regulations for InvITs on 17 July 2014 which were kept open for public comments till 24 July 2014

The final regulations were issued on 26 September 2014

InvIT Structure

► Aiding in financing/refinancing of infrastructure projects

► Un-locking tied up capital of developers

► Lowering domestic financial institutions’ loan exposure

► Attracting foreign capital

Why InvITs

Sponsor

Setup InvIT and appoint the trustee

Hold minimum required percentage of total units of InvIT

Trustee

Hold InvIT’s assets in the name of InvIT for the benefit of unit holders

Ensure investment manager makes timely payment of dividend to unit holders

Investment Manager

Make investment decisions in relation to underlying assets

Ensure assets have proper legal title and contracts entered are legal, valid and binding

Project Manager

Undertake operations and management of InvIT assets

For under construction projects, ensure progress of developments, approval status and such other aspects

InvITs – Final Regulations

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InvITs Framework

► Sponsor to set up InvIT; not more than 3

sponsors

► Cumulative projects size ≥ INR 500 cr

► Issue size ≥ INR 250 cr

► InvIT to invest in projects either directly or through SPVs (at least 50% holding at SPV level)

► Investment in units of InvITs is allowed by resident as well as non-resident investors

► Minimum distribution = 90% of distributable cash flow of InvITs/ SPVs

► Minimum lock-in period for sponsors – 3 years from the date of listing

► Investors to have right to remove the manager, trustee, request delisting, etc.

► Related party transactions to be on arm’s-length basis – related investors not permitted to vote

InvIT

Institutional investors

SPV-1

Trustee

Sponsor

SPV-2

Assets

Investment Manager

Asset Mgmt

Fee

to hold investments on behalf of

trust

PM to be appointed for each infra project

O&M contracts

Listing is mandatory

Project manager

Assets Assets

≥ 50% ≥ 50%

SPV-2

Assets

Not more than 3

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- Completed and revenue generating or

- Pre COD project

Infrastructure Sector

Infrastructure Projects

- Received

all requisite approvals

PPP

Non - PPP

Infrastructure is defined by the Ministry of Finance as per Notification dated 7 October 2013. Please refer Annexure 1

Any project in infrastructure sector.

Please refer Annexure 2

- Achieved COD as defined under the relevant project agreement

- Received all requisite approvals

- Generating revenue from operations for a period of not less than one year.

Please refer Annexure 2

- Not achieved COD

- Achieved completion of at least 50% of the construction as certified by independent engineer or expended not less than 50% of the total capital cost. Please refer Annexure 2

InvITs in India – Final Regulations Permissible assets

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Sponsor(s) qualifications

• Net worth of at least INR 100 crores in case of body corporate or a company or net intangible assets of INR 100 crores in case of a Limited Liability Partnership (LLP)

• Minimum experience of at least 5 years and has completed at least two projects

Investment Manager

qualifications

• Net worth of at least INR 10 crores in case of body corporate or a company or net intangible assets of INR 10 crores in case of a LLP

• Minimum experience of 5 years in fund management/ advisory services/ development in infrastructure sector

• 2 or more key personnel, having more than 5 years’ experience in fund management/ advisory services/ development in infrastructure sector

• 1 or more employee who has at least 5 years experience in relevant sub-sector in which InvIT proposes to invest

• Not less than half of its directors / members should be independent and they should not be directors / members of another InvIT

• An office in India from where operations pertaining to InvIT is proposed to be conducted

Trustee qualifications

• Registered with SEBI and is not an associate of sponsor/ investment manager; and

• Sufficient resources with respect to infrastructure, personnel etc. as specified by the board

InvITs in India Final regulations

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Borrowings

• Aggregate consolidated borrowings and deferred payments of the InvIT net of cash and cash equivalents shall never exceed 49% of the value of the InvIT assets

• If aggregate consolidated borrowings and deferred payments of InvIT net of cash and cash equivalents exceed 25% of the value of InvIT assets, for any further borrowing following is required to be obtained

• Credit rating from a credit rating agency registered with SEBI

• Approval of unit holders

Related party transactions

• Should be on an arms-length basis

• In case of publicly traded InvIT with respect to related party transactions entered into after initial offer, approval from unit holders is required if -

• Total value of such transactions relating to sale/purchase of assets or investments into securities exceed 5% of value of InvIT

• Value of funds borrowed from related parties exceed 5% of total consolidated borrowings

• Stringent conditions have been imposed including detailed disclosures, valuation requirements, approval from majority of investors etc.

InvITs in India Final regulations

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Different categories of InvITs Comparison

Parameter

Privately Placed InvITs Public InvITs

Investment >10% in Projects under construction

Investment >80% in Revenue Generating Projects

Raising of funds ► Listing is mandatory

► Funds to be raised by private placement

from institutional investors and body

corporates

► No lock-in restrictions for investments by

NRs

► Foreign Investment shall be subject to

guidelines specified by RBI

► Listing is mandatory

► No lock-in restrictions for investments by NRs

► Foreign Investment shall be subject to guidelines

specified by RBI

Listing conditions:

► Minimum public float - 25% of total outstanding

units of InvIT and units being offered by way of

offer document

Minimum

investment by

an Investor

INR 1cr

INR 10 lakhs

Investment

restrictions –

asset type

► Cumulative project size ≥ INR 500 cr

► Initial Offer size ≥ INR 250 cr

► Can invest in under construction projects ► To invest maximum of 10% in under construction

eligible infrastructure projects

Investment

conditions

No investment conditions prescribed ► 80% or more should be in completed and revenue generating projects

► Balance 20% or less can be invested in other specified investments

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Different categories of InvITs Comparison

Parameter

Privately Placed InvITs Public InvITs

Investment >10% in Projects under construction

Investment >80% in Revenue Generating Projects

Leverage limits ► Maximum borrowings and deferred payments net of cash and cash equivalents - less than 49% of the value of the InvIT assets

Price of units of InvIT

Through book building or any other process in accordance with the guidelines issued by the Board

Number Of investors

► Minimum - 5 Investors ► Maximum - 1000 Investors

► Minimum - 20 Investors ► Maximum - No Limit

Holding of each investor shall not be more than 25% of the units of the InvIT

InvITs – Comparative Analysis

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InvITs in India Comparative analysis of regulations

Particulars Draft regulations Final regulations Comments


No restriction on number of sponsors

Number of sponsors restricted to 3 Capped on number of sponsors

Net worth of at least INR 10 crores in case of body corporate or a company or net intangible assets of INR 10 crores in case of a Limited Liability Partnership (LLP)

Net worth of at least INR 100 crores in case of body corporate or a company or net intangible assets of INR 100 crores in case of a Limited Liability Partnership (LLP)

Increased the minimum net worth requirement of Sponsors to encourage considerate competition

No clarity for InvITs proposing to invest in PPP projects, where the regulatory requirement/concession agreement requires sponsor to hold a certain minimum percent in SPV

In case of PPP projects, other than regulatory requirement to hold certain minimum percent in SPV by sponsor – • Consolidated value of sponsor

holding shall be at least 25% of the value of units of InvIT or unit holders for not less than three years

• Where sponsor does not have a controlling interest in SPV and more than 50% of shareholding in the SPV, the sponsor shall enter into a bidding agreement so that the decisions are in compliance with the regulations and not against the interest of InvIT or unit holders

Sponsor’s holding in InvIT is not mandatory, if InvIT is proposing to invest in PPP projects, where the regulatory requirement requires sponsor to hold a certain minimum percent in SPV

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Minimum experience of 5 years in development of infrastructure or fund managements in infrastructure sector

Minimum experience of 5 years in development of infrastructure and has developed at least 2 projects

No change

Incase of PPP projects, sponsor shall mean the lead member of the concessionaire SPV

Incase of PPP projects, sponsor shall mean the infrastructure developer or SPV holding concession agreement

Now, Sponsor need not necessarily lead member

Investment Manager qualifications

Net worth of at least INR 5 crores in case of body corporate or a company or net intangible assets of INR 5 crores in case of a LLP

Net worth of at least INR 10 crores in case of body corporate or a company or net intangible assets of INR 10 crores in case of a LLP

Increased the minimum net worth requirement to encourage considerate competition

Minimum experience of 5 years in fund management/ advisory services/ development in infrastructure sector

Minimum experience of 5 years in fund management/ advisory services/ development in infrastructure sector

No change

2 or more key personnel, having more than 5 years’ experience in fund management/ advisory services/ development in infrastructure sector

2 or more key personnel, having more than 5 years’ experience in fund management/ advisory services/ development in infrastructure sector

No change

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Trustee qualifications

Registered with SEBI and is not an associate of sponsor/ investment manager; or

Registered with SEBI and is not an associate of sponsor/ investment manager; and

Associate can not be Trustee

If it is an associate of sponsor/ Investment manager, it should have 50% of its directors as independent

Sufficient resources with respect to infrastructure, personnel etc. as specified by the board

Sufficient resources to perform duties

It is not a trustee of another InvIT or an Alternative Investment Fund engaged in infrastructure sector

This has been removed

InvITs – Major changes in regulations

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InvITs in India Major Changes


Completed and Revenue Generated Projects

The assets of the Infrastructure Project had to be capitalised in the books of account of the SPV of the InvIT

This have been removed No capitalization requirements

Eligible Infrastructure Project

A Non-PPP project is an Infrastructure Project that has received all the requisite approvals and certifications for commencing construction of the project and has been rated by a credit rating agency

Now, A Non-PPP project will qualify as Infrastructure project, if all the requisite approvals have been received

No credit rating is required to qualify as eligible infrastructure project

Infrastructure It includes all infrastructure sub-sectors as defined by Cabinet Committee on Infrastructure vide Notification of Ministry of Finance dated March 1, 2012 and any amendments/additions made thereof

It includes all infrastructure sub-sectors as defined vide Notification of Ministry of Finance dated 7 October, 2013 and any amendments/additions made thereof

Now, hotels without specified category and convention centre to be included in the definition of infrastructure subject to minimum project cost. Please refer Annexure 1

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Public listed InvIT

Minimum subscription from any investor in initial and follow-on offer shall be INR five lakhs

Minimum subscription from any investor in initial and follow-on offer shall be INR ten lakhs

Considering the InvIT is a new financial instrument, retail investor with sound financial background should invest

Infrastructure Project

Any project in infrastructure sector excluding any project which has either or both of the following attributes – • Revenues from the project are

treated as rental or leasehold income

• Immovable assets related to the project are treated as investments and not as fixed assets

Incase of hotels or hospitals – • Leasing of land on which such

hospital or hotel is located shall not be an infrastructure project

• Revenues generated from operation and management of a hospital or hotel shall be an infrastructure project

Any project in infrastructure sector. Please refer Annexure 1

Definition modified to include those infrastructure assets where revenue is earned from leasing/letting out

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Privately offered InvIT

Required to mandatorily hold – • At least one post COD project • At least one pre COD project

This requirement has been removed

No requirement of necessary bundling of assets

Investment by publicly offered InvIT

Mandatory investment in minimum of two asset

This requirement has been removed

Considering the size of investment in infrastructure sector, one project may be enough for investment

Distributions made by InvIT

SPV/InvIT to distribute 90% of the net distributable income after tax

SPV/InvIT to distribute 90% of the net distributable cash flow

Higher distribution to investor

Incase of publicly offered InvIT, distributions shall be made every Quarter

Incase of publicly offered InvIT, distributions shall be made every six months

Distribution to be done half yearly

Incase of privately placed InvIT, distribution shall be made every six months

Incase of privately placed InvIT, distribution shall be made once a year

Distribution to be done yearly

Borrowings and deferred payments

The aggregate consolidated borrowings and deferred payments shall not exceed 49% of the value of the InvIT assets

The aggregate consolidated borrowings and deferred payments net of cash and cash equivalents shall not exceed 49% of the value of the InvIT assets

Clarity on how the consolidated borrowings should be calculated

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Sale or purchase of infrastructure projects

In case of publicly offered InvITs, for purchase or sale of infrastructure projects, whether directly or through SPVs- • Full valuation of the project

shall be undertaken by the valuer

• In case of a purchase, the asset shall not be purchased at a value greater than 110% of the value of the asset as assessed by the valuer;

• In case of a sale, the asset shall not be sold at a value less than 90% of the value of the asset as assessed by the valuer

In case of publicly offered InvITs, for purchase or sale of infrastructure projects, whether directly or through SPVs, full valuation of the project shall be undertaken by the valuer, if • In case of a purchase, the asset

is proposed to be purchased at a value greater than 110% of the value of the asset as assessed by the valuer

• In case of a sale, the asset is proposed to be sold at a value less than 90% of the value of the asset as assessed by the valuer

Subject to the approval of the unit holders

This will allow for a transaction of buying and selling of a non related party asset at a price outside the limits as specified by the draft regulations

Sale of units to public

No regulations proposed Units may be sold to public if such units have been held by sellers for a period of at least one year prior to the filling of draft offer document including the period of holding of equity shares / partnership interest in SPV

Clarity on minimum holding period prior to sale of unit

InvITs – Tax Provisions

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Tax provisions announced in Budget 2014

Specific tax regime proposed for listed InvIT – to be effective from 1 October 2014

Sponsor

Capital gains at the time of exchange of shares in SPV with units of business trust to be deferred. Such capital gains proposed to be taxable only at the time of disposal of units by sponsor

* Period of holding of such units - period of holding of shares of SPV to be included

* Cost of acquisition of such units – cost of shares in specified SPV

Future sale of units by sponsor – Capital gains tax as well as STT (if sold on exchange) to levied [section 111A/10(38)]

SPV

No tax concession proposed at SPV level

Distribution of dividend to trust - subject to DDT

Interest paid to trust – allowed as deduction. No taxes to be withheld

InvIT

Income of trust

- Dividend and interest received by trust from SPV – Exempt

- Capital gains on disposal of assets - taxable in the hands of InvIT (effective tax rate of 20% for long term capital gains with indexation benefit and maximum marginal rate for short term capital gains)

- Any other income – taxable at maximum marginal rate

Interest component of income distributed by trust to the unit holders would attract withholding tax @ 5%/ 10% for non-resident and resident unit holders respectively. Tax may be deducted at higher rate of 20% in absence of PAN. Dividend & capital gains component of income distributed by InvITs to the unit holders will be exempt in the hands of the unit holders

InvITs to file return of income

Unit-holder

Interest income received by non-resident unit holders taxable at 5% concessional rate & at applicable rates for resident holders

Capital gains on sale of listed units of InvIT on the exchange to attract levy of security transaction tax at par with that of listed equity shares. Long term capital gains (where units held for more than 36 months) would be exempt and short term capital gains would be taxable @ 15%. Where sale of units is off the exchange LTCG taxable at 20% and STCG @ applicable rates

MAT applicable on interest income and capital gains on sale of InvIT units

Thank you

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Annexure - 1 Final Regulations - List of infrastructure sub sectors

Infrastructure (as per notification dated 7 October 2013 of Ministry of finance)

Transport

► Roads and bridges ► Ports1

► Inland waterways ► Airport ► Railway track, tunnels, viaducts, bridges2 ► Urban public transport (except rolling stock in case of urban road transport)

Energy

► Electricity generation ► Electricity transmission ► Electricity distribution ► Oil pipelines ► Oil/Gas/liquefied natural gas (LNG) storage facility3

► Gas pipelines4

Water sanitation

► Solid waste management ► Water supply pipelines ► Water treatment plants ► Sewage collection, treatment and disposal system ► Irrigation (dams, channels, embankments etc.) ► Storm water drainage system ► Slurry pipelines

1 Includes capital dredging

2 Includes support terminal 3 Includes strategic storage of crude oil 4 Includes city gas distribution network

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Annexure - 1 Final Regulations - List of infrastructure sub sectors

Infrastructure (as per notification dated 7 October 2013 of Ministry of finance)

Communication

► Telecommunication (fixed network)5

► Telecommunication towers

► Telecommunication & Telecom services

Social and commercial infrastructure

► Education institutions (capital stock)

► Hospitals (capital stock)6

► Three-star or higher category classified hotels located outside cities with population of more than one million

► Common infrastructure for industrial parks, SEZ, tourism facilities and agriculture markets

► Fertilizer (Capital investment)

► Post harvest storage infrastructure for agriculture and horticultural produce including cold storage

► Terminal markets

► Soil-testing laboratories

► Cold chain7

► Hotels with project cost8 of more than Rs 200 crores each in any place in India and of any star rating

► Convention centers with project cost8 of more than Rs 300 crores each

5 Includes optic fiber/cable networks which provide broadband/internet 6 Includes medical colleges, para medical training institutes and diagnostics centers 7 Includes cold room facility for farm level pre-cooling, for preservation or storage of agriculture and allied produce, marine products and

meat 8 Applicable with propective effect from the date of notification and available for eligible prospects for three years from the date of

notification; eligible cost exclude cost of land and lease charges but include interest during construction

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Annexure - 2 Definitions

Associate ► Any person who controls, directly or indirectly ► In case of a company or a body corporate, any person who is designated as promoter of the

company/body corporate and any other company/body corporate with the same promoter ► In case of an individual, any relative of the individual ► In case of a company or a body corporate or an LLP, its group companies ► Companies/LLPs under the same management ► In case of an InvIT, related parties to the InvIT ► Any company or LLP or body corporate in which the person or its director/partner hold, either

individually or collectively, more than fifteen percent of its paid-up equity share capital or partnership interest, as the case may be

Eligible infrastructure project

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

Infrastructure All infrastructure sub-sectors as defined by vide Notification of Ministry of Finance dated October 7, 2013 and shall include any amendments/additions made thereof

Infrastructure project

Any project in infrastructure sector

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Special Purpose Vehicle

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; and ► which holds not less than 90% of its assets directly in infrastructure projects and does not invest in

other Special Purpose Vehicles; and ► which is not be engaged in any other activity other than activities pertaining to and incidental to

the underlying infrastructure projects

Completed and revenue generating project

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 operation date as defined under the

relevant project agreement 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;

► the Infrastructure Project has received all 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

Sponsor Company or LLP or body corporate who sets up the InvIT and assigned 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

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Pre-COD project

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 that project; or ► expended not less than 50% of the total capital cost set forth in the financial package of the

relevant project agreement

Under construction project

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 any agreement entered into with the lenders

Net Worth

Net worth‖ in relation to a company or a body corporate shall have the meaning assigned to it in or under sub-section (57) of section 2 of the Companies Act, 2013 As per sub-section (57) of section 2 of the Companies Act, 2013, net worth means – “The aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and Amalgamation”

Documents

Infrastructure Investment Trusts (InvITs)