The Securities and Exchange Board of India (SEBI) has issued a consultation paper introducing a regulatory framework for Restricted Return Infrastructure Investment Trusts (InvITs). InvITs allow investors exposure to infrastructure projects by pooling funds, offering either publicly offered and listed or privately placed and listed structures. The goal of this paper is to gather public feedback on structuring returns within InvITs, which may include defined return floors and caps. Here’s a closer look at the context, proposal, and implications of these changes.
Background and Current InvIT Framework
InvITs were introduced in India through SEBI’s Infrastructure Investment Trusts Regulations, 2014, with the purpose of enabling investors to participate in infrastructure investments and to provide stable distributions through income-generating projects. Public InvITs mainly focus on completed, income-generating assets, while privately placed InvITs are also permitted to invest in under-construction assets.
Currently, SEBI oversees around 26 registered InvITs, with approximately 6.4 lakh crore rupees in asset value. SEBI noticed that some InvITs involve structured arrangements that cap returns to unitholders, directing any excess returns to sponsors or designated parties. Despite this, the demand persists for structured InvITs with managed returns, demonstrating the need for regulatory guidelines to formalize and address such practices.
The Proposed Restricted Return InvIT Structure
SEBI’s consultation paper explores a framework for InvITs that offer restricted returns, suggesting floor (downside protection), cap (upside restriction), or both. This aligns with global investment products like Defined Outcome ETFs, which cap upside returns in exchange for downside protection.
SEBI’s proposal for restricted return InvITs includes:
Downside Protection: A guaranteed minimum return for investors, with deficits in returns met by sponsors or designated entities.
Upside Restriction: A cap on maximum returns, where any excess is transferred to sponsors or pre-determined entities.
Combined Floor and Cap: An arrangement with both minimum guaranteed and maximum capped returns, balancing protection with managed growth potential.
Key Features and Conditions
Restricted return InvITs will likely be available only to sophisticated, risk-informed investors who can understand these structured returns’ limitations. To this end, SEBI recommends they be restricted to privately placed InvITs, setting high minimum investment and trading thresholds (proposed at 500 crore rupees per investment).
Additionally, SEBI outlines that such InvITs should meet specific conditions:
Asset Value Requirement: Only InvITs with assets valued over 50,000 crore rupees are eligible.
Investor Agreement: Investors must sign a waiver undertaking their awareness of the return restrictions, potential upside limitations, and downside protections as applicable.
Monitoring and Evaluation: Periodic evaluations of asset performance are mandatory, along with an established agreement ensuring sponsor obligations are met in case of performance shortfalls.
Credit Rating: An independent credit rating on sponsor or affiliate entities is required to evaluate their ability to fulfill downside protections, offering transparency and a measure of security to investors.
