SEBI Proposal for Infrastructure Investment Trusts

Recognizing the
deficit in financing infrastructure development in India, SEBI has floated a
proposal for a separate investment vehicle for infrastructure investments. Last
week, it issued a Consultation
Paper on Infrastructure Investment Trusts
, on which comments are invited
from the public by January 20, 2014.
SEBI’s rationale is
to ensure that the lack of an effective investment framework does not hamper
infrastructure investments and development of the sector. SEBI seems to have
been inspired by specific investments structures elsewhere such as the business
trust in Singapore and Hong Kong as well as the master limited partnership in
the US (which we have discussed
earlier
).
SEBI has suggested
two plausible mechanisms to set up investment trust facilities. One is to
create it as a special category of mutual funds by way of a separate chapter in
the SEBI (Mutual Funds) Regulations, 1996. The other option is to create a new
vehicle of infrastructure investment trusts (InvITs), under a new set of
regulations to be promulgated for the purpose. In either scenario, the
investment is to be obtained into a special purpose vehicle (SPV) that carries
out the infrastructure project.
The primary purpose
of the proposal is to attract greater equity investment in the infrastructure
sector. It also allows the sponsors of infrastructure holdings to monetize
their investments, somewhat similar to the facility provided by real estate
investment trusts (REITs) to developers of real estate projects.
Whichever model is
followed for infrastructure investments, it is accompanied by stringent
conditions regarding the type of investments, stage and type of infrastructure
projects, manner and extent of distribution of profits, etc. The conditions are
too detailed to merit a discussion in this blog post, but they can be found in
the consultation paper.
While this is an
interesting effort on the part of SEBI to facilitate infrastructure
investments, there could be doubts regarding the impact it may have in actually
promoting the same. Past experience has suggested that creation of additional
investment structures and routes may not necessarily translate into greater
flow of investments to the desired extent. Moreover, the foresight displayed by
SEBI in this regard must be supplemented by reforms to be initiated by other
related regulators, a matter that SEBI itself has acknowledged in the
consultation paper. For example, the RBI would have to provide facilities for
foreign investment in instruments to be issued by InvITs. The tax authorities
will have to create the necessary environment to attract the required investments.
Often, such matters may not necessary follow within a short time frame, thereby
leading to dwindling responses from the investors. The route established by
SEBI for qualified foreign investors nearly two years ago is a case in point.

Finally,
the quagmire faced by infrastructure development and financing is a deeper
one. Of this, equity investments in the infrastructure sector form only a small
part. The present step by SEBI will address only that part. The larger issues
relate to the availability of debt financing, the lack of depth of the corporate
bond markets, the fact that the bankruptcy regime in India is still behind the
curve, and so on. These are apart from the other concerns in the infrastructure
sector that pertain to project-related issues such as land acquisition, permits
and consents, environmental issues, resettlement and rehabilitation, etc.
Granted that SEBI’s role is limited to the equity and bond markets, but its
efforts will have to be considered in the light of the bigger picture.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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