Alternative Investment Schemes and Units in Infrastructure...

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Alternative Investment Schemes and Units in Infrastructure Projects1

Introduction:

India’s position is in one of the fastest developing economies in the world. Real estate and

infrastructure are the two most important sectors for a sustainable economic growth and thus have

critical importance for the growth of social and economic parameters. The importance of these

sectors is quite evident from the 2008 financial crises which was triggered mainly by stagnant real

estate sector in the US. There are inherent hindrances to the development of these sectors like high

cost of development, less liquidation of assets, long gestation periods etc., which can be overcome

through continuous technical and financial innovation. A main testimony of the dynamic regulatory

regime is the introduction of InvITs and REITs. Banking and financial institutions have been

overburdened with the responsibility of financing infrastructure and real estate sector. But now,

these sectors have been attracting private financing through SPVs through private equity. InvITs

and REITs provide for an opportunity to participate in financing through liquid and stable

instrument and also encourages good corporate governance structures. It also provides an

opportunity to small and non institutional investors, majorly retail investors to participate in

infrastructure financing and reap benefits of the growth through marketable instruments which are

not much prone to speculation and volatility in equity instruments

In the last couple of years, many infrastructure companies have listed their products on overseas

stock exchange which had their regulatory regime established for business trusts ( like Singapore).

Not all companies were successful in listing their instruments because of high cost of capital and

regulatory expenditure. After introduction of InvITs, capital market of India has overcome the

disadvantage and provided Indian companies with the additional avenue for finances. 2016 was a

watershed year for InvITs- it has witnessed changes in regulatory structure and registration of 6

InvITs including India Grid Trust which filed its Draft Offer Document for an IPO. SEBI has also

1 Priyanka Parag Taktawala LL.M Gujarat National Law University

Published in Articles section of www.manupatra.com

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issued many consultation papers to receive comments from the public and amended Securities and

Exchange Board of India (Infrastructure Investment Trust) Regulations, 2014 to introduce changes

and streamline these regulations to align them with challenges of specific sectors, and continuing to

make financial instruments attractive to investors. SEBI has also made a framework for corporate

governance and disclosures for InVITs.

What is InvIT:

Infrastructure investment trust is a trust which is registered under the Registration Act and formed

under Trusts Act. According to the Trusts Act, trust is an obligation which is attached to the

ownership of a particular property. The author creates the obligation of the trust which is accepted

by the owner of the property and is then owed to the beneficiaries which are identified in the Deed.

Under the InvIT, trust is created by the “Sponsor”, ownership is vested with the “Trustee” and the

beneficiaries are “Unitholders”2

InvIT can invest in infrastructure projects only if 90% of the assets comprise of infrastructure

projects which fall under the framework which is provided under the Regulations. For applicability

of InvIT Regulations, “Infrastructure” includes the following infrastructure: roads and bridges,

metros, airports, electricity generation, transmission and distribution, telecommunication, capital

stock of hospitals, hotels and convention centres, common infrastructure for industrial activities3

The laws which are applicable to InvITs include the InvIT Regulations, InvIT Guidelines, Trust Act,

Registration Act, FEMA and Income Tax Act.

Project SPV/ a Holdco:

Project SPV can be either a company or an LLP in which the InvIT or Holdco proposes to hold

controlling interest and atleast 51% of the equity capital. However, in PPP where holding is not

allowed by the government or by the concession agreement, this clause will not be applicable and

2 'All About Infrastructure Investment Trusts (Invits) - Value Research: The Complete Guide To Mutual Funds' (Valueresearchonline.com, 2019) <https://www.valueresearchonline.com/story/h2_storyview.asp?str=33162&utm_medium=vro.in> accessed 1 March 2019. 3 September 9, 2016 issued by the Ministry of Finance, available at http://egazette.nic.in/WriteReadData/2016/171686.pdf


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will be subjected to the provisions of the Regulations. It also includes a company or LLP in (1)

which holds atleast 99% of its assets directly in such infrastructure projects and does not invest in

other SPVs and (2) which is not involved in any other activity except which is pertaining to

infrastructure projects4

An InvIT can invest in infrastructure projects through SPV but subject to investment restrictions

which includes (1) partner or shareholder of the SPV cant have any rights that prevent InvIT from

complying with the Regulations and (2) Investment Manager after consulting the Trustee, has to

appoint majority of the Board of Directors or the Governing Board of the SPV5

A Holdco can be a company or LLP (1) in which InvIT holds controlling interest and has atleast

51% equity share capital and which in turn has made investment in other SPVs, which at the end

holds infrastructure assets and (2) which is not engaged in activities apart from holding the

underlying SPVs, holding infrastructure projects and activities which are pertaining to such holdings

only6

InvIT can invest in infrastructure project through a Holdco which is subjected to certain restrictions

including (1) holding interest of InvIT in the SPV should be more than 26% and (2) Investment

Manager, after consulting the Trustee, should appoint majority of the Board of Directors of SPV

and Governing Board of Holdco7

Intermediaries which are involved in InvIT:

(a) Merchant Bankers:

Investment Manager has to appoint atleast one Merchant Banker who is registered under Merchant

Bankers Regulations and if there are more than one, one of them shall be the lead Merchant Banker

for the Issue of Units of InvITs. The InvIT is allowed to file the Draft Offer Document only

through a Merchant Banker8. Merchant Bannker has to exercise due diligence and file a certificate of

due diligence along with the Draft Offer Document and the Offer Document while opening of the

4 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 1 March 2019. 5 Ibid 6 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 4 March 2019. 7 Regulation 10 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 8 Ibid


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issue with SEBI. Merchant Bankers also tender their advice on appointment of other intermediaries.

Merchant Bankers are the direct link between the InvIT and SEBI and Stock Exchange during the

listing process which includes the final observation from SEBI and in-principle approval of the

stock exchange. Merchant Bankers also have post- Issue obligations like filing reports with SEBI,

investor grievance redressal, allotments, payment of interest etc.9

(b) Registrar to the Issue:

Any entity which is registered with SEBI has to accept applications from the investors, process these

applications, co-ordinate the allotment process of Units and refund subscription amount where

Units are not allotted. Registrar has to maintain electronic and physical bid data of the bids

received10

(c ) Syndicate Members:

Syndicate members’ job is to collect applications during the Issue period and enter details in the

bidding system of the stock exchanges and conduct preliminary verification before sending

applications to the Registrar of Issue11

(d) Public Issue Banks:

PIBs are banks with which the account for the public offer is opened for collection of application

money which is received from the investors. PIB are not required in a private placement.12

(e) Escrow Bank:

Escrow Bank acts as an escrow agent for the application money which is received after the public

offer from a non ASBA Investor. Escrow bank also manages refunds of excess money which is

received from non ASBA Investors13

(f) Credit Rating Agencies:

9 Regulation 10(5) of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 10 Schedule II of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 11 Ibid 12 Regulation 14 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 13 Ibid


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CRA is responsible for assigning credit to the Units of InvIT which is prescribed under the

Regulations. Credit rating is mandatory according to the InvIT Regulations which is to be obtained

from a CRA if the aggregate consolidated borrowings and deferred payments exceed 25% of the

value of the InvIT Assets.14

(g) Share Transfer Agents, Registered Brokers, Collecting Depository Participants:

They collect applications forms from applicants and enter details in the electronic bidding systems of

the Stock exchange and conduct preliminary verification before sending applications to the Registrar

to Issue15

(h) Advertising agency:

When it is a public offer, advertising agency has the responsibility of publicity and advertising, they

undertake public relations and provide information to Merchant Banker for enabling them to submit

compliance certificate to SEBI. However, advertisements are not allowed in case of private

placement16

Process for registration of an InvIT17:

Identification and appointment by the Sponsor of a Trustee

Sponsor has to form a trust under Trusts Act and register the trust under the Registration

Act

Investment manager and the project manager has to be identified

Application has to be submitted to SEBI by the Sponsor to register the InvIT along with the

draft of Trust Deed, Investment Management Agreement and Project Implementation and

Management Agreement

Information which is to be included in the application is

(i) Details of parties of InvIT

14 Regulation 20 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 15 Ibid 16 Ibid 17 Regulation3, Schedule I of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014


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(j) Description of assets which are to be included in the InvIT

(k) Details of investment strategy and business plan

(l) Details of disciplinary action and litigation under securities law against the parties to InvIT

and the directors

Application to be reviewed by SEBI and queries to be addressed in respect of application

and incorporate comments on the Trust Deed, Project Implementation, Investment

Agreement and Management Agreement

In principle approval by SEBI for registration

Submission of Trust Deed and Investment Management Agreement to SEBI

Grant of final registration certificate as an InvIT

Sponsor has to transfer the assets which constituted initial portfolio assets of InvIT to the

actual InvIT before allotment of Units of InvIT through public offer or private placements

Offerings by InvITs:

Mandatory listing requirement18:

An InvIT has to list its Units under the Regulations and if the InvIT fails to offer the Units through

private placement or public offer within 3 years of its registration with SEBI, it has to surrender the

certificate of registration and would cease to be an InvIT.

Types of Unit offerings19:

InvIT can undertake listing through IPO (Initial public offer) or a private placement of the Units.

Minimum size of private placement or public offer should be 25 crore Rupees or 2,500 million

Rupees. Listed InvIT can undertake various offerings of its Units like (a) preferential allotment, (b)

follow on public offer, (c) qualified institutional placement, (d) rights issue and (e) bonus issue.

However, InvIT Regulations don’t provide for guidelines or operational rules to undertake such

offerings of Units

Requirements for undertaking private placement or public offer for listing Units20:

18 Regulations 14,15,19,21,23, Schedule III of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 19 Regulation 14 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014


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InvIT will be eligible to undertake private placement or public offer for listing only if the value of

the assets including initial portfolio of assets i.e. value of portion of holding in the underlying assets

is minimum 5,000 million Rupees. Also, the size of the private placement or public offer has to be

atleast 2,500 million Rupees.

Public offer of Units by InvIT21:

Public offer of the units is an offer in which any person who is eligible to invest and they can

participate. Such participation is not restricted only to QIBs and body corporate. Also, any offer

made to more than 1,000 people will constitute a public offer. Public offer can be undertaken by

InvIT only if it complies with the following pre conditions:

(a) Atleast 80% of the value of the assets of InvIT will be invested in completed and revenue

generating projects of infrastructure.22

(b) Maximum 20% of the value of the assets of InvIT will be invested in other investments

which include under construction projects.23

Minimum requirement of 90% of the Issue size is necessary for a public offer. In case minimum

subscription is not received, InvIT w shall refund the application money which is received from

prospective investors within 12 working days from the Opening Date of the Issue, if they fail to

refund the application money, Investment Manager is liable to pay an interest of 15% per annum for

the delay period. There has to be atleast 20 investors in the public offer and each investor should

hold not more than 25% of the Units at any given time.24

Private placement of Units by InvIT25:

Private placement is offer which is limited only to OIBs and body corporate. Minimum number of

holders of Units in a private placement, other than Sponsor, associates and related parties is 5, out of

which each holder holds not more than 25% of the Units. Private placement can’t be made to more

than 1,000 investors. No advertisements can be issued related to the private placement. Minimum

20 Ibid 21 Regulation 16 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 22 Ibid 23 Ibid 24 Ibid 25 Regulation 14, 15 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014


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80% of the value of the assets has to be invested in infrastructure projects. There is no minimum

subscription requirement in private placement.

Parties and Intermediaries to an InvIT:

Sponsor26:

InvIT is a trust, Sponsor of InvIT is the author of it and has to transfer the initial portfolio of assets

to InvIT. Sponsor can be a company, body corporate or LLP. In PPP, Sponsor has to be an

infrastructure developer or SPV which has a concession agreement.

Eligibilities to be a Sponsor are27:

(a) Body corporate or a company’s net worth should be atleast 1,000 million Rupees. If it as

LLP, net tangible assets should be atleast 1,000 million Rupees.

(b) Sponsor or associates should have a stable and sound track record of minimum 5 years in

the field of development of infrastructure or fund management in the sector. If the Sponsor

is infrastructure developer, it should have developed atleast 2 projects

Rights and duties of the Sponsor28:

(a) Establishing trust, appointing a Trustee and Investment Manager and applying to SEBI for

registration

(b) Transferring to InvIT, its entire shareholding in the Holdco or SPV or ownership of the

project before allotment of Units

Trustee29:

26 Regulation 7 of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 27 Ibid 28 Ibid


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Trustee is the owner of the assets of the InvIT which are held by it in trust. Trustee holds the assets

for the Unitholders benefit. ownership of the assets is transferred by the author/sponsor.

(a) Trustee has to be registered with SEBI under the Debenture Trustee Regulation

(b) Trustee cannot be an associate of the Sponsor, Project Manager or Investment Manager

(c) Trustee should have the necessary infrastructure and human resources to undertake the

obligations

(d) Trustee should be a fit and proper person

Duties, roles and responsibilities of Trustee30:

Appointment and removal of Investment Manager and Project Manager

Overseeing activities of Project Manager and Investment Manager in the interest of

Unitholders

Enter into agreements like Trust Deed, Project Implementation & Management Agreement

and Investment Management Agreement etc.

Ensure that various reporting and disclosure requirements are complied with

Review status of complaints of the investor and redressal by Investment Manager

Distribution declarations to the Unitholders

Ensuring that the activities of InvIT are carried out according to the Trust Deed,

Regulations and Offer Document

Investment Manager31:

Investment Manager has the responsibility to undertake investment decisions, managing InvIT

Assets, initiating activities which are related to corporate aspects like Unitholder’s meering, investor

grievance redressal etc, ensuring that the requirements are complied with

Investment Manager can be a company, LLP or body corporate. Eligibility of Investment Manager

is32:

29 Regulation 19 of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 30 Ibid 31 Regulation 11 of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 32Regulation 3, Schedule I of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014


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(a) If Investment Manager is a company or a body corporate, net worth should be atleast 100

million and if it is an LLP, net tangible assets should be atleast 100 million

(b) Investment Manager should have experience of atleast 5 years in advisory services, fund

management or development of infrastructure sector

(c) Investment Manager needs to have atleast 2 employees, each employees should have atleast

5 years experience in advisory services or fund management or development of

infrastructure sector

(d) Investment Manager needs to have minimum 1 employee who has minimum experience of 5

years in relevant sub sectors

(e) Board of Directors or the governing board of the LLP of the Investment Manager should

have atleast 50% independent directors

(f) 50% of the Board of Directors or the governing board of the LLP of the Investment

Manager should not be on the Board of other infrastructure investment trusts

Duties, roles and responsibilities of Investment Manager33:

(a) Investment decision making regarding underlying projects or assets of InvIT which includes

future investment and divestment

(b) Supervising activities of Project Manager for ensuring compliance with Regulations

(c) Ensuring that the investments are in accordance to the Regulations and investment strategy

(d) Appointing intermediaries for activities of the InvIT after consulting the Trustee

(e) Ensuring timely and adequate redressal of grievance of Unitholders regarding activities of

InvIT

Project Manager34:

Project manager has the responsibility to achieve execution or management of the project. In PPP,

Project Manager has to be the entity which is responsible to execute the infrastructure project and

achieve the milestone according to the concession agreement and other documents. For entity to be

a Project Manager, it needs to be identified in the registration application and Draft Offer

Document

33 Ibid 34 Regulation 3, Schedule I; Regulations 14,15,19,21,23, Schedule III of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014


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(a) Project manager has to undertake management of the Assets of the InvIT which includes

arranging for maintenance, appointment and supervising agents etc

(b) Project manager has to also discharge the obligations of achieving timely completion of the

project which includes implementation, maintenance, operation and management of the

project.

Valuer35:

According to Section 247 of the Companies Act, 2013, Valuer can be any person who is a

“registered valuer” appointed by the Investment Manager for undertaking technical and financial

valuation of the Assets. Valuer cannot be an associate of the Sponsor or the Trustee of the

Investment Manager and should have minimum 5 years of experience in valuing infrastructure

assets

Under the InvIT Regulations, following entities can be a Valuer of InvIT: (i) chartered

accountant, (ii) cost accountant, (iii) company secretary, (iv) retired member of the Indian

Corporate Law Service, (v) merchant banker who has atleast 5 years of experience

Duties, roles and responsibilities of Valuer36:

(a) Valuer has to ensure that the valuation of the Assets are true, impartial and fair in

accordance to the InvIT Regulations

(b) Ensuring robust and adequate internal control for ensuring the integrity of valuation controls

(c) Has to disclose to the InvIT if there is any pending business transactions or other

arrangements with the Investment Manager with whom the InvIT is contracting and any

other details which might hinder the Valuer’ independence and professionalism

Auditor37:

Auditor will be appointed by the Investment Manager for a maximum of 5 consecutive years.

Auditor, who is not an individual, can be further reappointed for another 5 years but subject to

approval of Unitholders. Auditing of the InvIT’s financial statement should be done atleast once a

year.

35 Regulation 2 (zzf) of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 36 Regulation 13 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 37 Regulation 13 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014


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Auditor will audit and deliver a report on the financial statement to include it in the Draft Offer

Document, Offer Document and then the Final Offer Document or in case of private placement,

the placement memorandum. This report will include audited financial statements which are

prepared according to the applicable accounting standards. Auditor is mandated to subject itself to

peer review process of ICAI and also have a certificate which is issued by the Review Board of the

ICAI. Auditor has to certify forward looking projections which include assumption that the Assets

are owned by the InvIT. Auditor also has to prepare a statement of tax benefits which will be

available to the Unitholders and the InvIT38.

Also, market practice also mandates Auditors to provide “comfort letter” to the Merchant Bankers

at various stages in the Issue process, which is “negative assurances” or changes in the financial data,

statement records or operational and financial data which is included in the Draft Offer, Offer

Document and Final Offer Document or in private placement, Placement Memorandum39.

Transaction Documents:

Disclosure documents which are prescribed by SEBI40:

(a) For a private placement, final placement memorandum is required to be filed. There is no

requirement to submit draft Placement Memorandum with SEBI for review41

(b) For a public offer, Draft Offer Document is required to be filed atleast 30 days before filing

the Offer Document with the Stock Exchange and SEBI and has to make it available to the

public for atleast 21 days. Comments which are provided by SEBI on Draft Offer

Document has to be incorporated in the Offer Document.42

(1) Structure Related Transaction Documents:

These documents are related to setting up of InvIT, allocation of responsibilities, transfer of

portfolio assets to InvIT and mechanism for utilization of cash flow of SPV for distributing it to the

Unitholders.

38 Ibid 39 Ibid 40 Regulation 14 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 41 Regulation 16 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 42 Ibid


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(i) Trust Deed43: it is the constitutional document of the InvIT. It is entered between the

Sponsor, the Trustee and the InvIT before the registration of the InvIT. It sets out the

objectives of the InvIT and powers, duties, functions and responsibilities of the Investment

Manager and Trustee. Copy of the draft Trust Deed has to be submitted along with

registration application of InvIT to SEBI

(ii) Investment Management Agreement44: Investment Management Agreement is entered

into between the Trustee and the Investment Manager before the registration of InvIT. It

sets out the power, functions, responsibilities and duties of Investment Manager and also

those which are delegated by the Trustee

(iii) Project Implementation and Management Agreement45: it is entered into between the

Trustee, Investment Manager, Project SPV and Project Manager before the registration of

the InvIT.

(iv) Shareholders’ Agreement46: if the InvIT doesn’t hold 100% of the SPV or the Holdco,

Shareholders’ Agreement is mandatory to be entered into between the shareholders or

partners of Holdco or SPV and the InvIT. Such an agreement should be entered into before

investing in the SPV or Holdco

(v) Asset Purchase Agreement or Share Purchase Agreement47: this agreement is entered into

to transfer the SPV or Holdco which comprises of the portfolio assets from the Sponsor to

the Trustee. Share Purchase Agreement is entered between the Sponsor, Trustee, Investment

Manager and the Holdco or the SPV. Share Purchase Agreement or Asset Purchase

Agreement has to be finalized before filing Draft Offer Document. It has to be executed

before filing the Offer Document or Placement Memorandum and the closing has to be

before allotment of Units in the offer.

43 Regulation 26 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 44 Regulation 3, Schedule I of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 45 Regulation 23(5), Schedule IV of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 46 Ibid 47 Ibid


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(vi) Debenture Subscription Agreement or Loan Agreement48: it is entered into to establish

an efficient mechanism to transfer cash flows of SPV to the InvIT. This cash flow is then

used to distribute it to the Unitholders. It is entered into between the Trustee, Investment

Manager and the SPV before filing Offer Document or Placement Memorandum with SEBI

(2) Listing related Transactional Documents:

(i) Issue Agreement 49 : Issue Agreement is entered between the Merchant Bankers,

Investment Manager, Sponsor and Trustee before filing Final Order Document. It sets out

the roles and responsibilities of the Merchant Bankers, Trustees, Investment Manager.

Obligation of Merchant Banker is several and not joint. Fee arrangement is governed by

engagement letter between Merchant Banker and Investment Manager. If the public offer

has offer for sale, the shareholders will also be a party to the Issue Agreement. Issue

Agreement is not necessary for a private placement if there is an underwriting agreement.

(ii) Escrow Agreement50: Escrow Agreement is to define arrange for collection of application

bid amount from non- ASBA Investors. Agreement is entered into between the Trustee,

Investment Manager, Merchant Bankers, escrow collection banks and Registrar to the issue.

This agreement will also provide for the manner through which funds are transferred from

the escrow account to public offer account or refund account

(iii) Underwriting Agreement51: it is entered into between the Investment Manager, Trustee

and underwriters after deciding the price and allocation of the Units, before filing the Final

Offer Document. Underwriters agree to make payment in respect of certain units allotted to

the Unitholder which is procured by them and incase they default in payment for the unit,

the underwriter has to get more purchasers of purchase themselves the units which are

defaulted.

Process for Issue and Listing:

48 Ibid 49 Schedule –A of SEBI Guidelines for public issue of InvITs, 2016 50 Ibid 51 Ibid


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Public Listing:

(1) Pre filing of Draft Offer Document52:

Appoint Merchant Bankers and legal advisors

Hold a meeting when the senior management has provided for an overview of the

Sponsor and the business to the Merchant Bankers and the timelines are then

discussed

Identify the InvIT Assets, Investment Manager, Trustee and Project Manager

Prepare a data base for maintaining the details

Commence due diligence along with drafting the Draft Offer Document

Submit the application along with the draft Trust Deed, Projection Implementation,

Investment Management Agreement for SEBI to grant certificate of registration

Receive comments from SEBI on the Trust Deed, Investmement Management

Agreement etc.

Execute the Trust Deed and Investment Management Agreement

Receive certificate of registration from SEBI for the InvIT

While the agreement for acquisition of portfolio of assets i.e Asset Purchase

Agreement or Share Purchase Agreement will be executed before filing Draft Offer

Document, closing the transaction will be later, but before allotment of Units.

Closing of Debenture Subscription Agreement or Loan Agreement between Project

SPV and InvIT will be after receiving the final listing of Units and trading approval.

(2) Filing Draft Offer Document53:

Issue Agreement is executed

Standard certificate which is provided by Trustee, Investment Manager and Sponsor

is executed and the comfort letter is provided by the auditors

Draft Offer Document is filed with SEBI along with due diligence certificate by

Merchant Bankers

Application is filed with the Stock Exchanges for granting in principle approval for

trading and listing the Units.

52 Schedule- A (2) of SEBI Guidelines for public issue of InvITs, 2016 53 Ibid


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(3) SEBI review and observations54:

Reply to interim observations which are received from SEBI for the Offer

Document

Receipt of final observation from SEBI

(4) Post final observation and filing of Offer Document55:

File reply to final observations which are received from SEBI along with Draft Offer

Document

SEBI’s approval for the new updated Draft Offer Document

Execute escrow agreement and syndicate agreement

Execute updated comfort letter and standard certificate

File the Offer Document with SEBI and Stock Exchange for approval

(5) Issue period56:

Announce floor price or price band atleast 5 days before the opening of Issue

opening date

Open the Issue atleast 5 days after the date of filing the Offer Document with SEBI

Open the bidding period for subscription by investors except Anchor Investors

Close the Issue

(6) Post Issue period57:

Registrar shall get electronic bids from Stock Exchange

Investment Manager will decide the Issue price after consulting the Merchant Banker

Finalize the Issue price and file the Final Offer Document with SEBI and Stock

Exchange and execute the underwriting agreement

Registrar to the Issue will submit final basis of allotment to the Stock Exchange

Registrar and Merchant Banker instruct the collecting banks for credit of funds into

the public offer account

Investment Manager will allot the Units and credits to the successful bidders

54 Ibid 55 Ibid 56 Ibid 57 Ibid


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Investment Manager makes listing and trading approvals from the Stock Exchanges.

Stock Exchanges will provide final listing and trading approvals

Trading commences henceforth.

Private Placement:

(1) Pre-filing of Placement Memorandum58:

Appointment of legal counsels and Merchant Bankers

Arrange a meeting with the senior management and provide an overview of the

Sponsor and the Merchant bankers and discuss the Timelines

Identify the Trustee, Investment Manager, Project Manager and the Assets

Prepare data room of the information

Commence the exercise of due diligence along with commencing the drafting of the

Placement Memorandum

Submit the application along with the Draft Trust Deed, Project Impplementation

and Management Agreement and the Investment Manager Agreement for grant of

certificate of registration

Receive the comments from SEBI on the Trust deed, Project Implementation and

Management Agreement and the Investment Management Agreement

The agreement for acquiring the initial portfolio of shares i.e Share Purchase

Agreement and Asset Purchase Agreement has to be executed before the filing of

Placement Memorandum.

(2) Filing of Placement Memorandum59:

Application has to be filed with the Stock Exchanges for granting in-principle

approval for trading and listing of Units

File Placement Memorandum with SEBI 5 days before the opening of the Issue

(3) Post filing of Placement Memorandum60:

Close the Share Purchase Agreement and the Asset Purchase Agreement

Allot the Units to the investors

58 Regulation 14(2) of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 59 Regulation 15 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 60 Ibid


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Application filed for final listing and trading approvals from the stock exchange

Listing and Trading of Units on the Stock Exchanges

Investors and Investments:

Private Placement61: Investors are categorized into (i) QIBs and (ii) Body corporate. There is

no allocation required for each in this category

Public Offer62: (i) Institutional Investors have to be allotted not more than 75% of the Units

(ii) Other investors have to be allotted not more than 25% of the Units

Institutional Investors63: Institutional Investors can invest in the public issue of InvIT’s

Units but there are certain restrictions for the same. Certain categories are restricted from

investing in them because their legislations do not permit them to invest in such securities.

These investors are (i) Insurance Companies (ii) Schedule Commercial Banks

Anchor Investors64: Anchor Investors are Qualified Institutional Buyers, however, anchor

investor has to invest more than 10 crore and they bid earlier than the QIBs. Anchor

investors lead the bidding process in an IPO. Their participation gives reliable signs to the

investors, if the IPO has a strong investment from anchor investors, it encourages other

investors to invest in the IPO

75% of the Issue will be allotted to Institutional Investors on proportionate basis. After

consulting Merchant Bankers, Investment Manager can allocate 60% of the Institutional

Investor’s proportion to them65

Strategic Investors are also included as Anchor Investors

Anchor Investors has to apply for atleast 100 million in the public offer

Merchant banker or any person related in the public offer cant apply as an Anchor Investor

except mutual funds

Distribution Requirements:

61 Regulation 2(zl) of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 62 Regulation 2(zj) of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 63 Regulation 2(zq) of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 64 Ibid 65 Ibid


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InvIT has to distribute atleast 90% of its net cash flow to the Unitholders. The SPVs are required to

distribute atleast 90% of their net cash flow to the InvIT or the Holdco. In case the structure is two-

tired, Holdco has to distribute to the InvIT (i) 100% of the cash flows which is received from the

SPV and (ii) 90% of the net cash flow generated by it66

This distribution will be made (i) once every 6 months in publically offered InvITs and (ii) once

every year in case of privately placed InvITs and has to be made within 15 days from the date of

declaration. In addition to these periodic distributions, if any infrastructure assets are sold by the

InvIT, 90% of the proceeds of sales have to be distributed to the Unitholders, unless these proceeds

are to be reinvested in other infrastructure assets within 1 year67

Infrastructure Financing:

Building an infrastructure is a capital intensive process which involves low operational cost but high

initial costs. It requires a long term finance because the gestation period is longer than any other

sector. Infrastructure project is non recourse or limited recourse financing. Lenders can only be

repaid from the revenues which are generated from the project. Thus, market and risks which

include uncertainty of demand68. SPVs usually don’t have recourse to their parent company after the

initial capital is invested, nor do they have a strong balance sheet or credit history. Therefore, it

affects their capability to secure financing from the public. Because the output is non-tradable ( since

revenues accrue in local currency), such projects should be funded domestically in order to avoid

high risk of foreign exchange, though instruments help to mitigate the risks if there is a well

developed financial market in the country69.

(1) Debt Financing70:

Infrastructure financing has increased rapidly over the last few years with the rise in private

investment in this sector. This is majorly because of the dominant role which is played by

commercial banks and public sector banks which are willing to provide the finance required.

Lending by commercial banks for infrastructure which was followed by specialized Non Banking

66 Regulation 9 of Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 67 Ibid 68 Ibid 69 Ibid 70 Rajat Sharma, 'Indigrid Invit – Should You Invest?' (Sana Securities Blog, 2019) <http://www.blog.sanasecurities.com/india-grid-invit-invest-not/> accessed 4 March 2019.


20 | P a g e

Finance Companies (NBFC) which are dependent on the funds received by the banks also.

Insurance sector which is majorly dominated by LIC has also increased its financing in the

infrastructure sector71. Specialized NBFCs play a significant role in financing the infrastructure

sector, but their growth is constrained because they don’t have access to bank finance, in absence of

wholesale funding. There are tight prudential limits for lendings to NBFCs72. Even if the NBFCs are

able to fund the project by bank funds, the cost would be quite high because of higher incidental

capital charges and provisioning requirements. Banks are more inclined to provide finance for a

shorter tenor and have to annual reset their interest rates, therefore passing their interest rates to the

NBFCs73.

Insurance companies are another source for funding for the NBFCs. Insurance companies and

pension funds are perfect for funding the infrastructure projects because they have long term

liabilities. But in India, they are not well developed to penetrate the infrastructure sector. Statutory

restrictions by the government limit their investment in infrastructure74. Major restrictions are

minimum credit rating for debt instruments and minimum dividend payment. These conditions are

quite difficult for a private infrastructure project as they are established as an SPV and do not have

high credit rating. Public insurance companies invest more that what is required in government

securities and in public listed infrastructure companies to meet their minimum social sector

requirement instead of funding infrastructure projects.75

(2) Equity Financing:

High levels of debts require more equity to balance it, considering the level of risk involved in the

project. Equity is provided by the Sponsor to the SPV, who taps the primary market for required

71 'How Invits Or Infra Investment Trusts Can Make Money For You' (The Economic Times, 2019) <https://economictimes.indiatimes.com/markets/stocks/news/how-invits-or-infra-investment-trusts-can-make-money-for-you/articleshow/58838576.cms?from=mdr> accessed 4 March 2019. 72 'India Infrastructure Finance Company Ltd (IIFCL) | Department Of Financial Services | Ministry Of Finance | Government Of India' (Financialservices.gov.in, 2019) <https://financialservices.gov.in/banking-divisions/Financial-Institutions-and-others/India-Infrastructure-Finance-Company-Ltd-(IIFCL)?page=1> accessed 4 March 2019. 73 'Infrastructure Companies Need To Work On Innovative Instrument To Attract Global Funds: Suresh Prabhu' (The Economic Times, 2019) <https://economictimes.indiatimes.com/news/economy/policy/infrastructure-companies-need-to-work-on-innovative-instrument-to-attract-global-funds-suresh-prabhu/articleshow/66084367.cms> accessed 4 March 2019. 74 Ibid 75 Rajat Sharma, 'Indigrid Invit – Should You Invest?' (Sana Securities Blog, 2019) <http://www.blog.sanasecurities.com/india-grid-invit-invest-not/> accessed 4 March 2019.


21 | P a g e

capital. Substantial capital is raised by the companies from an IPO from the secondary market76.

Developers have limited capital and have to utilize it for a longer duration of time of the project. It

is important to include financial investors so that the promoter’s capital is recycled and invested in

another project. Financial investors are interested recently in this sector considering the number of

private equity and infrastructure funds which are formed. Most infrastructure projects are unlisted, it

is a disincentive for equity investors in infrastructure sector. In most cases, lenders are repaid but the

equity holders suffer a loss.77

What should can done:

For equity capital, many measures can be taken to invite entry of financial investors. Removing or

liberalizing the restrictions on financial investors, improving exit options for making exiting the

project a little more easier. We can’t rely only on domestic banks for meeting future requirements of

debt financing because of the high risks involved in it. Banks have to raise additional capital for

avoiding concentration of sector risk.

The advantage attached with NBFCs is the technical knowledge they have of the sector and the

complexities along with the risk absorption capacity for long gestation projects. Appraisal skill for

infrastructure project is limited in experience and scarce because of the PPP arrangement, NBFCs

play a vital role in procuring loans. Insurance companies also lean more towards highly rated NBFCs

for lending for infrastructure projects. NBFCs need to access the wholesale funding source which is

provided by multiple institutional players NBFCs are able to mitigate the risks and utilize their

capital optimally to churn their assets through securitization. Securitization is important because it

allows the banks and NBFCs to mitigate their risks.

Private placement of debt has limited significance. A bond market is important to provide greater

liquidity and risk mitigation. Bond market in India is small and undeveloped. Corporate bond market

is the least developed and not liquid at all. Indian corporate debt market trading is as good as

76 'Infrastructure Companies Need To Work On Innovative Instrument To Attract Global Funds: Suresh Prabhu' (The Economic Times, 2019) <https://economictimes.indiatimes.com/news/economy/policy/infrastructure-companies-need-to-work-on-innovative-instrument-to-attract-global-funds-suresh-prabhu/articleshow/66084367.cms> accessed 4 March 2019. 77 Pallavi Pengonda Harsha Jethmalani, 'Invits Suffer From A Case Of Misplaced Expectation' (https://www.livemint.com, 2019) <https://www.livemint.com/Money/e4OLKm4IbNvDsNfz5elj2N/InvITs-suffer-from-a-case-of-misplaced-expectation.html> accessed 4 March 2019.


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insignificant and the issuance is on private placement basis. It has been called a “ privately placed

loan market in the guise of a bond market”.

Infrastructure Development Fund (IDF)-

IDF is an attempt to address the problem of long term debt sourcing for infrastructure projects.

IDFs were established to enhance and accelerate the flow of long term debt. IDFs are to

supplement lending provided for infrastructure projects and provide a separate vehicle to refinance

the existing debt which are presently funded by the commercial banks and free their capital for other

projects. these IDFs can be established by Financial Institutions, Banks and Non Banking Financial

Companies. IDFs can be set up as a Mutual Fund or as NBFC78

Comparison of Debt Fund Structures between NBFCs and Mutual Funds:

Particulars Mutual Funds NBFCs

Structure Like a private equity fund Raise funds through Bonds and

Fund with Equity and Debts

Capital 100% equity finance 10% equity and 90% debt

instruments

Only domestic investor can

invest

Can issue a bond but with

minimum tenor of 5 years

Maturity Tenor of 5-10 years Going concern

Eligible Assets 90% debt instruments and 10%

equity for projects at any stage

PPP project with atleast 1 year

of operation

Minimum Credit Rating of

Investments

30% investment limit on

unrated or if rated, below

domestic BBB-

50% if approved by the asset

management company’s trustee

Domestic BBB-

Regulator SEBI RBI

78 Ibid


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Maximum Loan No limit 85% of the project cost under

the concession agreement

There are currently 3 NBFC IDFs- L&T IDF, IDFC IDF and ICICI Bank backed infra Debt are

active with consolidated asset of around INR 60 billion which is still a small amount when compared

to the quantum of infrastructure loans which are given by banks79

Functioning of IDF- Mutual Funds:

IDF-MF will raise resources through issuing Units of atleast 5 years maturity period, which will be

listed on the Stock Exchange and can be traded among investors. It has to invest atleast 90% of the

assets in the debt security of infrastructure companies or SPVs which are across all infrastructure

sectors and project type.80 Returns on the assets of the IDF will be distributed directly to the

investors after deducting the management fees. Credit risk which is associated with the project has

to be borne by the investors and not IDF. An existing mutual fund can also initiate an IDF

Scheme81

Functioning of IDF- NBFC:

IDF-NBFC will raise resources by issuing rupee denominated bonds of atleast 5 years maturity

period, which will be tradable between the investors. It can be invested in debt securities of only

PPP (Public Private Partnership) which will have a buyout guarantee (compulsorily buying out the

Project in case of termination of the Concession Agreement) and has to complete atleast 1 year of

commercial operations82. IDF will takeover upto 85% of total debt amount which is covered by the

concession agreement. Senior lenders will be retaining the remaining 15% for which they can charge

79 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 5 March 2019. 80 Rajat Sharma, 'Indigrid Invit – Should You Invest?' (Sana Securities Blog, 2019) <http://www.blog.sanasecurities.com/india-grid-invit-invest-not/> accessed 5 March 2019. 81 Pallavi Pengonda Harsha Jethmalani, 'Invits Suffer From A Case Of Misplaced Expectation' (https://www.livemint.com, 2019) <https://www.livemint.com/Money/e4OLKm4IbNvDsNfz5elj2N/InvITs-suffer-from-a-case-of-misplaced-expectation.html> accessed 5 March 2019. 82 'Infrastructure Companies Need To Work On Innovative Instrument To Attract Global Funds: Suresh Prabhu' (The Economic Times, 2019) <https://economictimes.indiatimes.com/news/economy/policy/infrastructure-companies-need-to-work-on-innovative-instrument-to-attract-global-funds-suresh-prabhu/articleshow/66084367.cms> accessed 5 March 2019.


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a premium from the infrastructure companies. Here, credit risk which is associated with the project

will be borne by the IDF. This structure is mainly for investors who are high risk takers.83

Masala Bonds- Low Risk High Potential:

Indian Rupee denominations as bonds are issued in offshore capital markets to help and expand the

avenues for debt funding of these infrastructure projects. The RBI’s effort is to start the issuance of

these off shore bonds by Indian companies and are consistent with the international standards to

reduce the disparities in currency denominations for the resident entities. These bonds are called

Masala bonds.84 Rupee denominated bond is to shield issuers from the risk of currency fluctuations

and also transfer the risk to investors who buy these bonds. As the investors will bear the currency

fluctuation risk, they will demand a premium coupon for it. Form the investors perspective, stable

currency is the main attractive feature for such offerings. To compare the local currency bond , a

similar overseas bond provides for an expanded market, there is a diverse liquidity pool and new

investors who might not be present onshore.85

Coupon Rate86: pricing of the bonds is the key element because of the very nature of the instrument.

India is rated BBB- by global rating agencies. Sovereign rating usually influences pricing of such

bonds. BBB- rating is just next to junk rating, investors expect a higher coupon, which makes such

bonds costly for Indian borrowers as compared to borrowers from countries which are rated better

than India.

Liquidity of Indian Currency and Rating of the Issuer87: Liquidity of the currency is an important criteria as

this provides an impetus to the subscribers of the issue. Past experiences reflects that the issuances

by the Public Sector Units are subscribed faster because of the nature of business and risk mitigation

provided to international investors

83 Ibid 84 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 5 March 2019. 85 Ibid 86 Ibid 87 Rajat Sharma, 'Indigrid Invit – Should You Invest?' (Sana Securities Blog, 2019) <http://www.blog.sanasecurities.com/india-grid-invit-invest-not/> accessed 5 March 2019.


25 | P a g e

Concerns of Masala Bonds88: overall credit rating of the country has to be considered before rating an

individual bond and the company, therefore, most Indian companies are treated as sub-investment

grade by these international investors. Allowing Indian companies to raise Rupee Denominated

loans from overseas market is moving towards full convertibility of the currency. Investor has to

take a call on the stability of the country and currency risk over the lifetime of the project, therefore,

a stable currency and sound sovereignty will influence the decision of the investor to participate in

masala bonds

Advantages of IDFs89:

One problem which is faced by banks while providing loans to infrastructure projects is the

mismatch of asset liability which is inherent with such projects. Thus, many infrastructure projects

are not provided finance by banks. IDF which issues bonds, credit enhancement in PPP projects will

be available. Such projects have a lower rate of risk involved and a higher credit rating. IDF which

issues Units, there is higher credit risk which is borne by the investors who are free to demand

higher returns later. After refinancing bank loans of the existing projects, IDFs have to take a larger

volume of the existing bank debt which will provide for an equal volume of new lending to

infrastructure projects. Therefore, IDFs have to channelize the long term low cost resources for

infrastructure financing. For IDM-MF, a bigger pool of assets is provided for investments in

airports, telecommunications, roads and social infrastructure like schools, hotels, hospitals etc.

NBFCs have restrictions to partly take out, mutual funds can take out 100% of the exposures.

Mutual funds are allowed to invest at any stage of the project cycle, IDF-NBFC has less risk

involved because it invests only in operational projects which are developed using PPP model.

Comparing with Global Scenario:

InvIT is a newer concept in India, tools to finance them like Business Trusts (BTs) have existed

since a few years in countries like Hong Kong, Singapore, Malaysia etc. In Singapore, trust manager

operates and holds business units to benefit the investors. Investors usually do not have any control

88 Pallavi Pengonda Harsha Jethmalani, 'Invits Suffer From A Case Of Misplaced Expectation' (https://www.livemint.com, 2019) <https://www.livemint.com/Money/e4OLKm4IbNvDsNfz5elj2N/InvITs-suffer-from-a-case-of-misplaced-expectation.html> accessed 5 March 2019. 89 Ibid


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over operations of the company90. Trust manager is usually an individual company which comprises

of Independent directors and management team. This model is in support of efficient management

and strong governance- qualities which appeal to investors, considering their interest is paramount.

In Hong Kong, business trusts use a stapled unit in company and units in BT. Stapling means that

two different securities are “stapled” together for transferring and trading. Trusts and companies

hold assets and then operate the businesses, but the active business such as asset development and

management are conducted by company while investments in funds and property are undertaken by

the trust91. Trustee manager in Hong Kong doesn’t get any management fees or incentives and only

receives reimbursement of expenses and costs. BTs in Malaysia are pool of cash generating assets

and distribute a large portion of profits to the investors.92

All these models have been successful in their respective countries. Our InvIT structure is modeled

on identical principles and is tailored to Indian Infra developers after consulting experts. The most

critical factor for its success will be ethical implementation and execution.

InvIT- The Journey so Far:

Companies with a strong portfolio, resilient track record, steady revenue stream can be potential

candidates for investment. Companies in roads, power, transmission have applied for SEBI

registration. In my view, debt-laden infrastructure entities looking for long term equity options are

best to apply for InvITs. Following is an indicative list of companies which has approval from

SEBI:93

Name of Company Assets to be transferred

IRB Infrastructure Developers Ltd Roads

90 'All About Infrastructure Investment Trusts (Invits) - Value Research: The Complete Guide To Mutual Funds' (Valueresearchonline.com, 2019) <https://www.valueresearchonline.com/story/h2_storyview.asp?str=33162&utm_medium=vro.in> accessed 5 March 2019. 91 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 5 March 2019. 92 'India Infrastructure Finance Company Ltd (IIFCL) | Department Of Financial Services | Ministry Of Finance | Government Of India' (Financialservices.gov.in, 2019) <https://financialservices.gov.in/banking-divisions/Financial-Institutions-and-others/India-Infrastructure-Finance-Company-Ltd-(IIFCL)?page=1> accessed 5 March 2019. 93 'Infrastructure Companies Need To Work On Innovative Instrument To Attract Global Funds: Suresh Prabhu' (The Economic Times, 2019) <https://economictimes.indiatimes.com/news/economy/policy/infrastructure-companies-need-to-work-on-innovative-instrument-to-attract-global-funds-suresh-prabhu/articleshow/66084367.cms> accessed 5 March 2019.


27 | P a g e

GMR Infrastructure Ltd Mix of operational road and transmission

assets

MEP Infrastructure Developers Ltd Toll collection and operation, maintain &

transfer assets

IL&FS Transportation Networks Ltd Roads, thermal and renewable energy assets

Sterlite Power Transmission Ltd Power transmission assets

Adani Group Ports, power transmission lines and power

generation assets

Mytrah Energy Limited Renewable energy assets

Challenges for Issuers of InvIT:

The ability to provide an environment of volatile interests is the main challenges for any issuer.

Additionally, issuers face challenge to obtain a premium valuation for their invested assets which

depends on a number of factors like sponsor experience, credibility, quality and ability to generate

revenue of the underlying assets. InvITs are competing with domestic products with similar

characteristics like AIF which offer more flexibility in everyday operations and also allows the

investors to invest in infrastructure assets.94

Initially, investors in the infrastructure sector are patient and have a longer horizon for their

investments. Government pushes the investment in infra sector which offer products like InvIT is a

positive for the sector which help in attracting investors and getting fresh capital. The first few

InvITs have gone through rigorous compliances and tax structuring but to succeed, they should

offer the desired yield to the Investors.

Pension Fund Industry:

Pension fund and provident fund are repositories for large amount of long term finance. Because of

Government regulations, pension funds are a notionally funded scheme. 2/3rd of the fund exists as

special deposits with the Central Government. These funds can’t be withdrawn for deployment in

94 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 5 March 2019.


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other projects/avenues95. A major portion of the remaining fund are invested in Government

securities which are locked in for 2 reasons: (i) once a Government security is subscribed for,

regulations have mandated to be held till maturity. (ii) investment guidelines have mandated that

interest which is received from the Government securities should be reinvested in the same

securities. Because of the huge investment which is required for investment in infrastructure sector,

which cant be met only using the domestic savings, there is a strong need to divert funds from

International market as well96

Challenges Faced by Pension Funds:

There are many numerous issues which need to be overcome to attract more investment including

the perception that India is still a challenging country for infrastructure investment because of the

prevailing risk which is associated with projects and investment structures due to unpredictable

regulations and taxation policies. India also faces competition from smaller countries like Columbia,

Chile, Australia, Peru among others, many of them have created easier investment models in this

sector.97 This class of investors usually help in monetizing high ticket investments and hence freeing

the capital which is then used for other projects. Government has put in efforts to allow pension

funds and promote new investment structure. Other issues are valuation expectations by the

promoters and the discount rates which are applicable to the assets. Mismatch in valuation and other

issues have to be straightened for investment to be smooth.98

Projects and Segments which are suitable for Financing Products:

Debt Products99:

Product Segments Applicable

95 'All About Infrastructure Investment Trusts (Invits) - Value Research: The Complete Guide To Mutual Funds' (Valueresearchonline.com, 2019) <https://www.valueresearchonline.com/story/h2_storyview.asp?str=33162&utm_medium=vro.in> accessed 5 March 2019. 96 'Sebi Proposes Easier Norms For Reits, Invits For Greater Access' (The Economic Times, 2019) <https://economictimes.indiatimes.com/markets/stocks/news/sebi-proposes-relaxed-norms-for-reits-invits-for-greater-access/articleshow/67754981.cms?from=mdr> accessed 5 March 2019. 97 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 5 March 2019. 98 Rajat Sharma, 'Indigrid Invit – Should You Invest?' (Sana Securities Blog, 2019) <http://www.blog.sanasecurities.com/india-grid-invit-invest-not/> accessed 5 March 2019. 99 Ibid


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Long term Bonds Roads, Ports, Power

(Conventional and Renewable),

Airports, Railways,

Transmission

Projects with an operational

history providing adequate

revenue to the investors

Masala Bonds Projects with high cost of debt

and low revenue risk.

This product is suited for

financial institutions for lending

to infrastructure projects. Will

help in reducing significant

interest cost for projects with

high cost of debt

IDF-MF Roads, airports, ports, water,

power generation, power

transmission, social

infrastructure

IDF-MF can invest at any stage

in the project cycle including

Greenfield and brown field

projects

IDF-NBFC Roads, ports, airports Limited to PPP projects

Equity Products100:

Product Segment Applicable

InvITs Roads, Transmission, Power Apt for corporate houses with a

substantial portfolio of highly

leveraged operating assets with

stable annuity like yield bearing

cash flows

Pension Funds Roads, Renewables Projects with long gestation

periods and revenue certainty

are a perfect fit for funding

from pension funds. Typically

characterized by low risk and

100 'India Infrastructure Finance Company Ltd (IIFCL) | Department Of Financial Services | Ministry Of Finance | Government Of India' (Financialservices.gov.in, 2019) <https://financialservices.gov.in/banking-divisions/Financial-Institutions-and-others/India-Infrastructure-Finance-Company-Ltd-(IIFCL)?page=1> accessed 5 March 2019.


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moderate returns expectation.

India Infrastructure Finance Company Ltd (IIFCL)101:

Funding Foundation of the Future:

IIFCL is a wholly owned company of the Government of India, set up in 2006 for providing long

term finance to infrastructure which is viable through Scheme called “Financing Viable

Infrastructure Projects” through a SPV (Special Purpose Vehicle) called India Infrastructure Finance

Company Ltd.

The sectors which are eligible for assistance from IIFCL financially, are according to the

Harmonized list of Infrastructure Sub-Sectors which are approved by the RBI and Government and

are amended regularly. These sectors include energy, transportation, water, communication,

sanitation, commercial and social infrastructure.102

IIFCL is registered as NBFC-ND-IFC with RBI. Authorized capital of the company is 3,900 Crore.

IIFCL has a gross sanction of 63,800 Crore under direct lending for over 360 projects and

distributions of 45,000 crore under Refinance and Takeout Finance.103

Senior Debt: being a part of the consortium, IIFCl has provided for long term funding to

commercially viable projects like taking exposure of 20% of the Total Project Cost. In PPP projects

that provide for compulsory buyback on termination, IIFCL offers loan with a longer tenure than

other lenders and other lenders are paid out, remaining the sole lender.

Subordinate Debt: IIFCL provides for a subordinate debt of upto 10% of the project cost including

the exposure of 20% of the Total Project Cost. This is also a Quasi Equity.104

101 Pallavi Pengonda Harsha Jethmalani, 'Invits Suffer From A Case Of Misplaced Expectation' (https://www.livemint.com, 2019) <https://www.livemint.com/Money/e4OLKm4IbNvDsNfz5elj2N/InvITs-suffer-from-a-case-of-misplaced-expectation.html> accessed 5 March 2019. 102 'India Infrastructure Finance Company Ltd (IIFCL) | Department Of Financial Services | Ministry Of Finance | Government Of India' (Financialservices.gov.in, 2019) <https://financialservices.gov.in/banking-divisions/Financial-Institutions-and-others/India-Infrastructure-Finance-Company-Ltd-(IIFCL)?page=1> accessed 5 March 2019. 103 'Sebi Proposes Easier Norms For Reits, Invits For Greater Access' (The Economic Times, 2019) <https://economictimes.indiatimes.com/markets/stocks/news/sebi-proposes-relaxed-norms-for-reits-invits-for-greater-access/articleshow/67754981.cms?from=mdr> accessed 6 March 2019. 104 <https://www.thehindubusinessline.com/markets/irb-invit-distributes-3unit-net-drops-45-in-q2-to-374-cr/article25301923.ece> accessed 6 March 2019.


31 | P a g e

Takeout Finance: this scheme of IIFCL has addressed the Asset Liability Mismatch and constraints

which are faced by banks by removing the loans from the books of banks. This will help banks to

free their funds for investing in other infrastructure projects. IIFCL can lend upto a maximum of

30% of the Total Project Cost. Disbursement in Takeout Finance is generally carried out one year

after the Commercial Operation Date (COD)105.

Credit Enhancement Scheme106: under this Scheme, IIFCL provides for partial credit guarantee to boost

the credit rating of bonds which are issued by companies to AA or higher for refinancing the

existing loans IIFCL undertakes credit enhancement of upto 20% of the Total Project Cost subject

to maximum 50% of the total Project Bonds. Credit enhancement helps to channelize long term

funds from insurance and pension funds into such bonds. Asian Development Bank is providing

guarantee to IIFCL of 50% of the underlying risk. IIFCL helps refinance the banks and other

financial institutions for their loans provided to infrastructure projects.

InvITs suffer from misplaced expectations:

Infrastructure investment trust (InvITs) have not been successful to create much excitement on the

stock exchange. Shares of Indian InvITs- IRB InvIT Fund and India Grid Trust, have not

performed upto the benchmark since their listing. InvITs are not the standard classic equity

instruments, returns are in the form of interest, dividends and buybacks. InvITs are hybrid

investment instruments. That’s also one of the reasons why this security has not caught the interest

of investors yet. Distribution per unit (DPU) is a major parameter to gauge if the companies are

delivering returns over and above the share prices. Within the existing regulatory framework, InvITs

are classified as an equity and thus the pool of capital they attract are from equity funds. Therefore,

the benchmarks are equity indices and hence compared to InvITs. In reality, InvITs resemble debt

more than equity and a mismatch happens when a fund which has a higher cost of capital invests in

a “debt like” instrument. Equity investors look to earn a higher return than what these “debt like”

instruments can deliver. If debt funds invest in InvITs, their post listing performance will be better

Conclusion:

105 Pallavi Pengonda Harsha Jethmalani, 'Invits Suffer From A Case Of Misplaced Expectation' (https://www.livemint.com, 2019) <https://www.livemint.com/Money/e4OLKm4IbNvDsNfz5elj2N/InvITs-suffer-from-a-case-of-misplaced-expectation.html> accessed 6 March 2019. 106 'How Invits Or Infra Investment Trusts Can Make Money For You' (The Economic Times, 2019) <https://economictimes.indiatimes.com/markets/stocks/news/how-invits-or-infra-investment-trusts-can-make-money-for-you/articleshow/58838576.cms?from=mdr> accessed 6 March 2019.


32 | P a g e

As newer activities pick up, regulations around InvITs will evolve for catering the needs of the

capital markets. The nascent debt market in India requires regulations which allow flexibility to

borrow InvIT type structure. Also, regulators in India have to be mindful of the challenges and

needs that India centric financial market presents. The most important driving factor is a robust

regulatory regime which facilitates large scale transactions and relatively smaller deals.

From the perspective of business, advantages of the structure of InvIT is there for both demand and

supply side. From the demand side, there is business listing assets and therefore, the demand side

looks to raise capital. The supply side is mainly for the suppliers of money, which are usually the

investors that are looking to invest in assets.

The most important advantage for the demand side which is seeking capital is the ability to raise

funds by utilizing their assets which can be monetized without having to use the debt or equity

which could impact the business’ balance sheet. For the supplier of the same capital, advantage is the

ability to invest in certain assets which are easy to value and returns of the project which then

provides an opportunity to match their asset-liability. The real innovation, for businesses comes by

identifying segments which they wish to develop like telecom tower assets for monetizing segments

like consumer-facing business which they choose to show in their balance sheets because such

segments are more attractive from a Return on Invested Capital perspective.


Date post:	05-Aug-2020
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