Issue of Subordinate Units by InvITs: Framework Finally in Place

Months after sharing its proposals on the subject, the Securities and Exchange Board of India (SEBI) has notified amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”), prescribing a mechanism for the issuance of subordinate units by InvITs to the sponsor, its associates and the sponsor group.

These amendments were notified after the SEBI Board gave its nod at the 204th meeting held in March (click here to read the key decisions taken at this meeting).

Prior to the amendment, the InvIT Regulations specified that subordinate units could be issued only to sponsors and their associates and that such subordinate units carried inferior voting rights or any other rights compared to other units. Further, a framework or mechanism for issuing subordinate units was not in place earlier.

Under the Amendment Regulations, a subordinate unit has been defined as an “instrument issued by an InvIT which can be reclassified as an ordinary unit”. Chapter IV A provides the framework for the issuance of subordinate units. As per this framework, subordinate units can only be issued by a privately placed InvIT upon acquisition of an infrastructure project.

Notably, it is stated that subordinate units will not carry any voting or distribution rights. While SEBI, in December of last year, proposed that subordinate units should carry only inferior voting or any other inferior rights in comparison to ordinary units, its subsequent proposals from earlier this year presented three options to stakeholders; a) subordinate units shall carry no distribution and no voting rights, b) subordinate units shall carry inferior distribution rights and inferior voting rights to the extent of ten percent of the corresponding rights conferred on ordinary units, or c) a combination of floor and cap may be specified as to the extent of inferior distribution rights and inferior voting rights which can be offered on the subordinate units vis-à-vis ordinary units. The first option has been zeroed in on after holding public consultation.

The Amendment Regulations also contain provisions regarding the transfer of subordinate units, extension of entitlement date, etc.