Wednesday, December 25, 2013

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.

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