The infrastructure sector in India has historically failed to attract large offshore capital because of various systematic reasons – one of which being the absence of a well-governed tax optimal investment structure. To provide a more flexible regime for sophisticated investors, SEBI introduced the concept of ‘unlisted’ InvITs. However, SEBI has significantly eroded the very idea and lucrativeness of unlisted InvITs with its recent amendments. Effective August 2021, SEBI prescribed that every unlisted InvIT must have (a) a minimum of 5 distinct unit holders required other than the sponsor, its related parties, and its associates; and (b) such 5 unitholders must hold at least 25% of the total InvIT units.

Public Float for Private Unlisted InvITs

• Unlisted InvIT regime amended – 5 independent unit holders required to hold 25% (‘unrelated’ to sponsors)
• 6 months grace period for existing structures; no grandfathering
• Term ‘related to sponsor’ defined widely – includes import of meaning from companies act and accounting standards; hinges on the interpretation of the term ‘significant influence’
• FPI as public – ambiguous, yet unlikely to be categorised as non-sponsor related

Infrastructure development has been one of the focal points for the Modi government. The infrastructure sector in India has historically failed to attract large offshore capital because of various systemic reasons – one of which being the lack of a well-governed tax optimal investment structure. To address this, after years of deliberation, SEBI introduced the infrastructure investment trusts (InvITs) regime allowing for a SEBI governed tax-optimised investment regime. InvITs could be public or privately listed. One of the challenges that even private listed InvITs faced was that key private communication between the manager and the sponsor or the investors had to be publicly disclosed. Despite being private in nature, private listed InvITs had to comply with regulations around leverage, investments, number of unitholders etc., akin to publicly listed InvITs.

To provide a more flexible regime for sophisticated investors, SEBI introduced the concept of ‘unlisted’ InvITs. At the heart of it, unlisted InvITs achieved two important objectives: (a) a taxoptimal investment regime for global investors; and (b) SEBI oversight (to inspire investor confidence) with light touch regulations. Once the tax benefits were aligned between listed and unlisted InvITs, unlisted InvITs became the most preferred asset-monetization vehicle for all developers and investors.

Within a short span of time, the industry has already witnessed 2 large unlisted InvITs. Just as unlisted InvITs became the flavour, SEBI has, to a large extent, removed the distinction between listed and unlisted InvITs, and the lucrativeness of unlisted InvITs with its recent amendments. Effective August 2021, SEBI prescribed that every unlisted InvIT must have (a) a minimum 5 distinct unit holders required other than the sponsor, its related parties and its associates; and (b) such 5 unitholders must hold at least 25% of the total InvIT units.

These amendments strike at the core of the unlisted InvIT regime for the following reasons.

1. Counterintuitive Amendments: Legislative “certainty” is the cornerstone of any new M&A vehicle. Unlisted InvITs were introduced just a couple of years ago after several deliberations and therefore, investors were naturally expecting the broader legal landscape to remain unaltered. To impose a minimum ‘public’ (persons unrelated to promoter / sponsor are generally referred to as public) float in an unlisted vehicle not only appears counterintuitive but destroys the vestiges of regulatory predictability that foreign investors expect. Such drastic regulatory flip-flops can be devastating – especially when the government is unveiling multiple programmes simultaneously to attract investments into the infrastructure sector.
2. Intent and Amendment Misaligned: SEBI’s amendments were premised to achieve the following purposes – to discourage sponsors from setting-up unlisted InvITs which are driven by tax incentives, but do not result in either of (a) fresh capital infusion, (b) monetization of assets, (c) development of infrastructure, or (d) repayment of existing domestic debt. It seems that the Ministry of Finance (MoF) was keen to proscribe structures aimed at exploiting the tax benefits without ‘true asset monetisation’ being achieved. The simplest solution in such a scenario would have been to mandate that every unlisted InvIT, which fails to fulfilthe purposes soughtto be achieved by the amendment, will be disallowed from claiming the tax benefits. However, prescribing public (non-sponsor related) float requirements without adequate industry consultation disturbs the paradigm of regulatory predictability that forms the foundation of foreign investor sentiment.
3. ‘Unrelated’ Ambiguity: The amendment defines “related parties” and “associates” of the sponsor relationship in the widest possible manner. The terms draw their meaning from the definition of Companies Act 2013 and applicable accounting standards, which defines the term in context of ‘significant influence’. Mere appointment of an investor director on the sponsor could result in the investor being qualified as an associate of the sponsor. The broad ambit of the terms has created interpretational uncertainty, leaving the door wide open for regulatory misinterpretation. SEBI should, in-line with its general practice, initiate industry wide consultations before enacting such all-pervasive legislation that disturbs deal-making equilibrium and has far-reaching implications.
4. FPI Status: Foreign portfolio investors (FPIs) have specifically been included as ‘public’ in the InvIT Regulations. However, since the regulations concerning unlisted InvITs do not refer to the term ‘public’, but rather use the terms ‘unrelated to the sponsor’, it remains to be seen whether an FPI holding could qualify as being ‘unrelated to the sponsor’. There is, therefore, a keenness to explore private listed InvITs and take the benefit of the FPI as a deemed public investor, with 4 other unrelated investors. However, basis our understanding of the regulatory intent, SEBI may not be comfortable with sponsor related FPIs being used to meet the non-sponsor related criterion.
5. Presumption of Abuse: To begin with, given the capital-intensive nature of the infrastructure sector, only a select pool of large global fund-houses have the ability to commit patient capital. In most cases, such capital was coming through reputed financial institutions that invests patiently under the so called ‘social license’. At least such investors, known for their stature and ethics globally, should be treated differently. However, in one stroke, all investors and developers have been coloured with the same brush and are mandated to find other like-minded co-investors in order to set-up InvITs, which can sometimes be difficult.
6. Grandfathering Omitted; Sub-optimal Compliance Timelines: Existing InvITs are required to find new unitholders within a 6-month grace period. First, SEBI’s reluctance to grandfather existing legitimate structures (which have already fulfilled the purposes of the amendments) appears as an exception to the well-accepted principle of ‘legitimate expectation’ and should be re-assessed. Second, considering the high valuations of the existing InvITs and the current global outlook, SEBI should consider a longer grace period since introduction of new independent investors will need to be effected carefully and could be time-consuming.

Overall, while SEBI’s objective with the amendment appears to address a tax abuse concern (i.e. developers rolling-over assets to self-owned InvITs), it could unsettle the foundational principles of unlisted InvITs on several counts. The unlisted InvIT regime was introduced in the first place as a regime for sophisticated investors and private ownership of assets. To muddle the regime now with a public float requirement is unlikely to send the right signals to the global investor community. SEBI and MOF should consider realigning the amendments such that the objective of preventing tax abuse is achieved without disturbing the nuts and bolts of the existing unlisted InvIT framework.

This material is for general information only and is not intended to provide legal advice. An abridged version of this article was also published on BloombergQuint. For further information, please contact:

Heena Ladji

Shreyas Bhushan

Ruchir Sinha