Infrastructure Investment Trusts

InvIT - Background and framework

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

Why InvITs InvIT Structure

Setup InvIT and appoint the trustee
► Aiding in financing/refinancing of infrastructure Sponsor
projects Hold minimum required percentage of total
units of InvIT

Hold InvIT’s assets in the name of InvIT for the

benefit of unit holders
Trustee
► Un-locking tied up capital of developers Ensure investment manager makes timely
payment of dividend to unit holders

Make investment decisions in relation to

Investment underlying assets
► Lowering domestic financial institutions’ loan
Manager Ensure assets have proper legal title and
exposure
contracts entered are legal, valid and binding
Undertake operations and management of
InvIT assets
Project
► Attracting foreign capital For under construction projects, ensure
Manager
progress of developments, approval status
and such other aspects

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InvITs – Final Regulations
InvITs
Framework

► Sponsor to set up InvIT; not more than 3

Sponsor Institutional investors
sponsors
Not more ► Cumulative projects size ≥ INR 500 cr
than 3
► Issue size ≥ INR 250 cr
Listing is ► InvIT to invest in projects either directly or
mandatory through SPVs (at least 50% holding at SPV
level)
Asset Mgmt Investment
Trustee InvIT Manager ► Investment in units of InvITs is allowed by
Fee
resident as well as non-resident investors
to hold
investments ► Minimum distribution = 90% of distributable
on behalf of cash flow of InvITs/ SPVs
trust ► Minimum lock-in period for sponsors – 3
≥ 50% ≥ 50% Project years from the date of listing
manager ► Investors to have right to remove the
SPV-1 SPV-2 SPV-2 manager, trustee, request delisting, etc.
O&M
► Related party transactions to be on arm’s-
contracts
length basis – related investors not permitted
Assets Assets Assets to vote

PM to be appointed for each infra project Assets

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InvITs in India – Final Regulations
Permissible assets
Any project in - Achieved COD as defined
infrastructure sector. Infrastructure under the relevant project
Please refer Annexure 2 Projects agreement
- Received all requisite
approvals
PPP
- Generating revenue from
operations for a period of
- Completed not less than one year.
- Received and Please refer Annexure 2
all requisite revenue
approvals generating
or
- Pre COD
project
Non - PPP - Not achieved COD
- Achieved completion of at
least 50% of the construction
Infrastructure as certified by independent
Sector engineer or expended not
less than 50% of the total
capital cost. Please refer
Annexure 2

Infrastructure is defined by the

Ministry of Finance as per
Notification dated 7 October
2013. Please refer Annexure 1

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InvITs in India
Final regulations

• Net worth of at least INR 100 crores in case of body corporate or a company or net
Sponsor(s) intangible assets of INR 100 crores in case of a Limited Liability Partnership (LLP)
qualifications
• Minimum experience of at least 5 years and has completed at least two projects

• 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
Investment management/ advisory services/ development in infrastructure sector
Manager
qualifications • 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

• Registered with SEBI and is not an associate of sponsor/ investment manager; and
Trustee
qualifications • Sufficient resources with respect to infrastructure, personnel etc. as specified by
the board

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InvITs in India
Final regulations

• 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
Borrowings 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

• 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
Related party investments into securities exceed 5% of value of InvIT
transactions • 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.

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Different categories of InvITs
Comparison
Privately Placed InvITs Public InvITs
Parameter Investment >10% in Projects under
Investment >80% in Revenue Generating Projects
construction

Raising of funds ► Listing is mandatory ► Listing is mandatory

► Funds to be raised by private placement ► No lock-in restrictions for investments by NRs
from institutional investors and body ► Foreign Investment shall be subject to guidelines
corporates specified by RBI
► No lock-in restrictions for investments by
NRs Listing conditions:
► Foreign Investment shall be subject to ► Minimum public float - 25% of total outstanding
guidelines specified by RBI units of InvIT and units being offered by way of
offer document
Minimum
investment by INR 1cr INR 10 lakhs
an Investor

Investment ► Cumulative project size ≥ INR 500 cr

restrictions – ► Initial Offer size ≥ INR 250 cr
asset type
► Can invest in under construction projects ► To invest maximum of 10% in under construction
eligible infrastructure projects

Investment No investment conditions prescribed ► 80% or more should be in completed and revenue
conditions generating projects
► Balance 20% or less can be invested in other
specified investments

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Different categories of InvITs
Comparison

Privately Placed InvITs Public InvITs

Parameter
Investment >10% in Projects under
Investment >80% in Revenue Generating Projects
construction

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

Number Of ► Minimum - 5 Investors ► Minimum - 20 Investors

investors ► Maximum - 1000 Investors ► Maximum - No Limit

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

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InvITs – Comparative Analysis
InvITs in India
Comparative analysis of regulations
Particulars Draft regulations
No restriction 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)
No clarity for InvITs proposing to
invest in PPP projects, where the
Sponsor(s) regulatory requirement/concession
qualifications agreement requires sponsor to hold
a certain minimum percent in SPV
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Final regulations
Number of sponsors restricted to 3
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)
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
Comments
Capped on number of
sponsors
Increased the minimum
net worth requirement
of Sponsors to
encourage considerate
competition
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
InvITs in India
Comparative analysis of regulations
Particulars Draft regulations
Minimum experience of 5 years in
development of infrastructure or
fund managements in
Sponsor(s) infrastructure sector
qualifications
Incase of PPP projects, sponsor
shall mean the lead member of the
concessionaire SPV
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
Investment Minimum experience of 5 years in
Manager fund management/ advisory
qualifications 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
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Final regulations Comments
Minimum experience of 5 years in No change
development of infrastructure and
has developed at least 2 projects
Incase of PPP projects, sponsor Now, Sponsor need not
shall mean the infrastructure necessarily lead member
developer or SPV holding
concession agreement
Net worth of at least INR 10 crores Increased the minimum
in case of body corporate or a net worth requirement
company or net intangible assets of to encourage
INR 10 crores in case of a LLP considerate competition
Minimum experience of 5 years in No change
fund management/ advisory
services/ development in
infrastructure sector
2 or more key personnel, having No change
more than 5 years’ experience in
fund management/ advisory
services/ development in
infrastructure sector
InvITs in India
Comparative analysis of regulations
Particulars Draft regulations
Registered with SEBI and is not an
associate of sponsor/ investment
manager; or
Trustee
qualifications
If it is an associate of sponsor/
Investment manager, it should have
50% of its directors as independent
Final regulations Comments
Registered with SEBI and is not an Associate can not be
associate of sponsor/ investment Trustee
manager; and
Sufficient resources with respect Sufficient resources to
to infrastructure, personnel etc. as perform duties
specified by the board

It is not a trustee of another InvIT This has been removed

or an Alternative Investment Fund
engaged in infrastructure sector

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InvITs – Major changes in regulations
InvITs in India
Major Changes
Particulars Draft regulations
Completed and The assets of the Infrastructure
Revenue Project had to be capitalised in the
Generated books of account of the SPV of the
Projects InvIT
Eligible A Non-PPP project is an
Infrastructure Infrastructure Project that has
Project received all the requisite
approvals and certifications for
commencing construction of the
project and has been rated by a
credit rating agency
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
Page 16
Final regulations
This have been removed
Now, A Non-PPP project will
qualify as Infrastructure
project, if all the requisite
approvals have been received
It includes all infrastructure
sub-sectors as defined vide
Notification of Ministry of
Finance dated 7 October,
2013 and any
amendments/additions made
thereof
Comments
No capitalization
requirements
No credit rating is
required to qualify as
eligible infrastructure
project
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
InvITs in India
Major Changes
Particulars Draft regulations Final regulations Comments
Public listed Minimum subscription from any Minimum subscription from any Considering the InvIT is a
InvIT investor in initial and follow-on investor in initial and follow-on new financial instrument,
offer shall be INR five lakhs offer shall be INR ten lakhs retail investor with sound
financial background
should invest
Infrastructure Any project in infrastructure Any project in infrastructure Definition modified to
Project sector excluding any project sector. Please refer Annexure include those
which has either or both of the 1 infrastructure assets
following attributes – where revenue is earned
• Revenues from the project are from leasing/letting out
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

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InvITs in India
Major Changes
Particulars Draft regulations Final regulations Comments
Privately Required to mandatorily hold – This requirement has been No requirement of
offered InvIT • At least one post COD project removed necessary bundling of
• At least one pre COD project assets

Investment by Mandatory investment in minimum This requirement has been Considering the size of
publicly offered of two asset removed investment in
InvIT infrastructure sector,
one project may be
enough for investment
SPV/InvIT to distribute 90% of the SPV/InvIT to distribute 90% of the Higher distribution to
net distributable income after tax net distributable cash flow investor

Distributions Incase of publicly offered InvIT, Incase of publicly offered InvIT, Distribution to be done
made by InvIT distributions shall be made every distributions shall be made every half yearly
Quarter six months

Incase of privately placed InvIT, Incase of privately placed InvIT, Distribution to be done
distribution shall be made every six distribution shall be made once a yearly
months year

Borrowings and The aggregate consolidated The aggregate consolidated Clarity on how the
deferred borrowings and deferred payments borrowings and deferred payments consolidated
payments shall not exceed 49% of the value net of cash and cash equivalents borrowings should be
of the InvIT assets shall not exceed 49% of the value calculated
of the InvIT assets

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InvITs in India
Major Changes
Particulars Draft regulations
Sale or In case of publicly offered InvITs,
purchase of for purchase or sale of
infrastructure infrastructure projects, whether
projects 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
Sale of units to No regulations proposed
public
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Final regulations Comments
In case of publicly offered InvITs, This will allow for a
for purchase or sale of transaction of buying
infrastructure projects, whether and selling of a non
directly or through SPVs, full related party asset at
valuation of the project shall be a price outside the
undertaken by the valuer, if limits as specified by
• In case of a purchase, the asset the draft regulations
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
Units may be sold to public if such Clarity on minimum
units have been held by sellers for holding period prior to
a period of at least one year prior sale of unit
to the filling of draft offer
document including the period of
holding of equity shares /
partnership interest in SPV
InvITs – Tax Provisions
Tax provisions announced in Budget 2014

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

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
Sponsor
* 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)]

No tax concession proposed at SPV level

SPV Distribution of dividend to trust - subject to DDT
Interest paid to trust – allowed as deduction. No taxes to be withheld
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)
InvIT - 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
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
Unit-
equity shares. Long term capital gains (where units held for more than 36 months) would be exempt and short term capital
holder 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

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Thank you
Annexure - 1
Final Regulations - List of infrastructure sub sectors
Infrastructure (as per notification dated 7 October 2013 of Ministry of finance)

► Roads and bridges

► Ports1
► Inland waterways
Transport
► Airport
► Railway track, tunnels, viaducts, bridges2
► Urban public transport (except rolling stock in case of urban road transport)

► Electricity generation
► Electricity transmission
► Electricity distribution
Energy ► Oil pipelines
► Oil/Gas/liquefied natural gas (LNG) storage facility3
► Gas pipelines4
► Solid waste management
► Water supply pipelines
► Water treatment plants
► Sewage collection, treatment and disposal system
Water sanitation
► 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)
► Telecommunication (fixed network)5
Communication ► Telecommunication towers
► Telecommunication & Telecom services
► 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)
Social and
commercial ► Post harvest storage infrastructure for agriculture and horticultural produce including cold storage
infrastructure ► 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 An Infrastructure Project which prior to the date of its acquisition by or transfer to the InvIT,
infrastructure satisfies the following conditions:
project ► 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 Any project in infrastructure sector

project

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Annexure - 2
Definitions
Special Any company or LLP:
Purpose ► in which the InvIT holds or proposes to hold controlling interest and not less than 50% of the
Vehicle 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 An Infrastructure Project which prior to the date of its acquisition by or transfer to the InvIT, satisfies
and the following conditions:
revenue ► the Infrastructure Project has achieved the commercial operation date as defined under the
generating relevant project agreement including the concession agreement, power purchase agreement or
project 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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Annexure - 2
Definitions
Pre-COD An infrastructure project which :
project ► 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 Infrastructure project, whether PPP or non-PPP, which has not achieved commercial operation date
construction as defined under the relevant project agreements including the concession agreement, power
project 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”

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