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Governance arrangements in Infrastructure Investment Trusts – First steps on the path to certainty?

14 Jul 2023

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Permissibility of governance arrangements amongst sponsors and significant unitholders in Infrastructure Investment Trusts has been debated for several years. SEBI has now proposed a codified mechanism for board representation on investment managers for minority unitholders. This article analyses the implications and takeaways of SEBI's proposal.

Partner: Arnav Dayal, Counsel: Vishal Sagar

Introduction

Infrastructure investment trusts (InvITs) have gained popularity in recent years as a vehicle for infrastructure investments, with project developers, private equity firms, pension funds and sovereign wealth funds looking to boost yields and access liquidity. An InvIT is structured as a trust (which receives investments), and is managed by an ‘investment manager’, which is a separate company (where management control of the trust is vested).

Considering the capital-intensive nature of infrastructure investments, several co-investment structures consisting of strategic sponsors (such as developers and private equity funds) and long-term financial co-investors (such as sovereign wealth funds and international pension funds) have taken root amongst InvITs, across sectors ranging from highway assets to renewable energy.

Designing an appropriate governance and economic framework for such co-investments presents unique challenges, primarily due to the bifurcated legal structure of InvITs and a reluctance on the part of the Securities and Exchange Board of India (SEBI) to permit ‘special rights’ for unitholders holding a significant stake (current SEBI regulations require all unitholders in an InvIT to have equal rights).

Recently, SEBI decided to provide minority unitholders in InvITs with statutory governance rights in the form of representation on the board of directors of investment managers. This article discusses the key issues arising out of SEBI’s decision and suggests some potential solutions.

Background

Until a few years ago, it was common practice for unitholders of InvITs holding significant positions to be granted the right to nominate directors to the boards of investment managers, with such rights being incorporated in the governing documents of the InvIT and the investment manager entity. However, SEBI’s concern – that such an arrangement would violate the regulatory bar on ‘special rights’ for unitholders – has led to the current practice of co-investors with significant positions in an InvIT picking up a corresponding equity stake in the investment manager, in connection with which they obtain governance rights such as board representation and reserved matters.

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