SEBI lays down framework for conversion of private listed InvITs

Prabhat Nigam

25 Mar, 2022

A recent circular of the Securities and Exchange Board of India (SEBI) has delineated the framework of the conversion of private listed InvITs into a public Infrastructure Investment Trust (InvIT). SEBI has also laid down few guidelines for the conversion of private UNlisted InvITs to private listed ones. But before diving into the above mentioned framework, let us first understand the concept of InvITs.   

What is meant by ‘InvITs’?

InvIT is a short form for Infrastructure Investment Trust. It is similar to a pooled investment vehicle like mutual funds. Unlike mutual funds who invest in financial securities, an InvIT invests in infrastructure assets like roads, power plants, pipelines, transmission lines etc. the contributions are collected from individual/institutional investors to be invested in infrastructure to earn a small portion of income as a return. InvITs work on similar lines of Real Estate Investment Trusts.

Which are the entities on whom the framework for conversion of private listed InvITs is applicable?

The given framework for the conversion of private listed InvITs is applicable on the following entities:

1. All the Infrastructure Investment Trusts (InvITs)
2. All parties to InvITs
3. All recognised Stock Exchanges 
4. All merchant bankers

Conditions laid down by SEBI for Conversion of public listed InvITs 

The circular issued by SEBI says that the conversion of private listed InvIT into a public listed InvIT will require the private listed InvIT to issue units to the public either through a fresh issue or/and an offer for sale.

 For a private listed InvIT to convert into a public one, it has to follow various requirements which include the following among others. The private listed InvIT must have at least 5 investors other than the sponsors, its related parties and its associates.

Once the issue has been made and listing of units has taken place, the private listed InvIT shall stand transformed into a public InvIT. This newly transformed public entity shall be required to comply with all the provisions of InvIT rules which have been prescribed for public InvITs.

SEBI has said that the private listed InvIT has to fulfil certain conditions with regards to the conversion from a private listed InvIT to a public one. These conditions include obtaining approval from a minimum of 75% unit holders by value for the issue of public units.

In addition to the abovementioned requirements, the private listed InvIT has to comply with all the applicable listing and disclosure requirements since the date the private listed InvIT is listed or preceding three years whichever is less.

It must be noted that previous imposition of monetary fines by the stock exchanges either on the private listed InvIT or on its investment manager shall not be a ground from preventing the private liste InvIT to issue units.

The private listed InvIT must not have defaulted in making distributions from the date of its listing or from the preceding three years whichever is less.

SEBI mandates that minimum contributions from the sponsors in case of public issue of units should either not be less than 15% of the units issued through the public issue or 15% of the post-capital issue.     

The units received in lieu of the contributions made by the sponsors shall be locked-in for a minimum period of 18 months from the date of listing of units allotted in such issue.

However, if the units of the public issue are already locked-in and the remaining lock-in period is more than 18 months, even then the units will continue to be locked-in for such remaining period.

SEBI has also clarified its position about the transferability of units which are held by the sponsors in excess of the minimum contribution made by them. In that case, SEBI clarified that such excess units shall continue to remain locked-in for a minimum period of one year from the date of listing of units in the public issue.

SEBI has also prescribed for a cap on the maximum subscription of the investors other than the sponsors, their related parties and their associates. The cap has been set at 25% of the total unit capital on the post issue basis.

With regards to the disclosures made in the draft offer document, it is mandated by SEBI^[1] that an InvIT has to disclose the details of its distributions made by it & comparison of actual performance vis-a-vis the projections made in placement memorandum at the time of the initial offer.

Private UNlisted InvIT

SEBI has also clarified in a separate circular about the conversion of an unlisted private UNlisted InvIT into a private listed InvIT. The UNlisted private InvIT may list its units and get converted into a private listed Invit on making a private placement of units through a fresh issue &/ or an offer for sale.

Once the units have been issued and the listing of units has taken place through private placement, the private UNListed InvIT will be considered as a private listed InvIT and then it will be liable to comply with rules that have been prescribed for the private listed InvITs.

Conclusion

The framework released by SEBI not only facilitates ease of doing business but by putting the restrictions such as lock-in period on the units held by the sponsors for a certain period of time and minimum subscriptions from them also ensures that the InvITs do not end up hurting the interests of the investors. This move of conversion of private listed InvITs will further attract investment from large pool of investors & act as a catalyst in the development of the infrastructural growth of the country.

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