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Infrastructure Investment Trusts
InvIT - Background and framework
Page 3
Infrastructure Investment Trusts (InvITs) Background
Securities and Exchange Board of India (SEBI) issued draft regulations for InvITs on 17 July 2014 which were kept open for public comments till 24 July 2014
The final regulations were issued on 26 September 2014
InvIT Structure
► Aiding in financing/refinancing of infrastructure projects
► Un-locking tied up capital of developers
► Lowering domestic financial institutions’ loan exposure
► Attracting foreign capital
Why InvITs
Sponsor
Setup InvIT and appoint the trustee
Hold minimum required percentage of total units of InvIT
Trustee
Hold InvIT’s assets in the name of InvIT for the benefit of unit holders
Ensure investment manager makes timely payment of dividend to unit holders
Investment Manager
Make investment decisions in relation to underlying assets
Ensure assets have proper legal title and contracts entered are legal, valid and binding
Project Manager
Undertake operations and management of InvIT assets
For under construction projects, ensure progress of developments, approval status and such other aspects
InvITs – Final Regulations
Page 5
InvITs Framework
► Sponsor to set up InvIT; not more than 3
sponsors
► Cumulative projects size ≥ INR 500 cr
► Issue size ≥ INR 250 cr
► InvIT to invest in projects either directly or through SPVs (at least 50% holding at SPV level)
► Investment in units of InvITs is allowed by resident as well as non-resident investors
► Minimum distribution = 90% of distributable cash flow of InvITs/ SPVs
► Minimum lock-in period for sponsors – 3 years from the date of listing
► Investors to have right to remove the manager, trustee, request delisting, etc.
► Related party transactions to be on arm’s-length basis – related investors not permitted to vote
InvIT
Institutional investors
SPV-1
Trustee
Sponsor
SPV-2
Assets
Investment Manager
Asset Mgmt
Fee
to hold investments on behalf of
trust
PM to be appointed for each infra project
O&M contracts
Listing is mandatory
Project manager
Assets Assets
≥ 50% ≥ 50%
SPV-2
Assets
Not more than 3
Page 6
- Completed and revenue generating or
- Pre COD project
Infrastructure Sector
Infrastructure Projects
- Received
all requisite approvals
PPP
Non - PPP
Infrastructure is defined by the Ministry of Finance as per Notification dated 7 October 2013. Please refer Annexure 1
Any project in infrastructure sector.
Please refer Annexure 2
- Achieved COD as defined under the relevant project agreement
- Received all requisite approvals
- Generating revenue from operations for a period of not less than one year.
Please refer Annexure 2
- Not achieved COD
- Achieved completion of at least 50% of the construction as certified by independent engineer or expended not less than 50% of the total capital cost. Please refer Annexure 2
InvITs in India – Final Regulations Permissible assets
Page 7
Sponsor(s) qualifications
• Net worth of at least INR 100 crores in case of body corporate or a company or net intangible assets of INR 100 crores in case of a Limited Liability Partnership (LLP)
• Minimum experience of at least 5 years and has completed at least two projects
Investment Manager
qualifications
• Net worth of at least INR 10 crores in case of body corporate or a company or net intangible assets of INR 10 crores in case of a LLP
• Minimum experience of 5 years in fund management/ advisory services/ development in infrastructure sector
• 2 or more key personnel, having more than 5 years’ experience in fund management/ advisory services/ development in infrastructure sector
• 1 or more employee who has at least 5 years experience in relevant sub-sector in which InvIT proposes to invest
• Not less than half of its directors / members should be independent and they should not be directors / members of another InvIT
• An office in India from where operations pertaining to InvIT is proposed to be conducted
Trustee qualifications
• Registered with SEBI and is not an associate of sponsor/ investment manager; and
• Sufficient resources with respect to infrastructure, personnel etc. as specified by the board
InvITs in India Final regulations
Page 8
Borrowings
• Aggregate consolidated borrowings and deferred payments of the InvIT net of cash and cash equivalents shall never exceed 49% of the value of the InvIT assets
• If aggregate consolidated borrowings and deferred payments of InvIT net of cash and cash equivalents exceed 25% of the value of InvIT assets, for any further borrowing following is required to be obtained
• Credit rating from a credit rating agency registered with SEBI
• Approval of unit holders
Related party transactions
• Should be on an arms-length basis
• In case of publicly traded InvIT with respect to related party transactions entered into after initial offer, approval from unit holders is required if -
• Total value of such transactions relating to sale/purchase of assets or investments into securities exceed 5% of value of InvIT
• Value of funds borrowed from related parties exceed 5% of total consolidated borrowings
• Stringent conditions have been imposed including detailed disclosures, valuation requirements, approval from majority of investors etc.
InvITs in India Final regulations
Page 9
Different categories of InvITs Comparison
Parameter
Privately Placed InvITs Public InvITs
Investment >10% in Projects under construction
Investment >80% in Revenue Generating Projects
Raising of funds ► Listing is mandatory
► Funds to be raised by private placement
from institutional investors and body
corporates
► No lock-in restrictions for investments by
NRs
► Foreign Investment shall be subject to
guidelines specified by RBI
► Listing is mandatory
► No lock-in restrictions for investments by NRs
► Foreign Investment shall be subject to guidelines
specified by RBI
Listing conditions:
► Minimum public float - 25% of total outstanding
units of InvIT and units being offered by way of
offer document
Minimum
investment by
an Investor
INR 1cr
INR 10 lakhs
Investment
restrictions –
asset type
► Cumulative project size ≥ INR 500 cr
► Initial Offer size ≥ INR 250 cr
► Can invest in under construction projects ► To invest maximum of 10% in under construction
eligible infrastructure projects
Investment
conditions
No investment conditions prescribed ► 80% or more should be in completed and revenue generating projects
► Balance 20% or less can be invested in other specified investments
Page 10
Different categories of InvITs Comparison
Parameter
Privately Placed InvITs Public InvITs
Investment >10% in Projects under construction
Investment >80% in Revenue Generating Projects
Leverage limits ► Maximum borrowings and deferred payments net of cash and cash equivalents - less than 49% of the value of the InvIT assets
Price of units of InvIT
Through book building or any other process in accordance with the guidelines issued by the Board
Number Of investors
► Minimum - 5 Investors ► Maximum - 1000 Investors
► Minimum - 20 Investors ► Maximum - No Limit
Holding of each investor shall not be more than 25% of the units of the InvIT
InvITs – Comparative Analysis
Page 12
InvITs in India Comparative analysis of regulations
Particulars Draft regulations Final regulations Comments
Sponsor(s) qualifications
No restriction on number of sponsors
Number of sponsors restricted to 3 Capped on number of sponsors
Net worth of at least INR 10 crores in case of body corporate or a company or net intangible assets of INR 10 crores in case of a Limited Liability Partnership (LLP)
Net worth of at least INR 100 crores in case of body corporate or a company or net intangible assets of INR 100 crores in case of a Limited Liability Partnership (LLP)
Increased the minimum net worth requirement of Sponsors to encourage considerate competition
No clarity for InvITs proposing to invest in PPP projects, where the regulatory requirement/concession agreement requires sponsor to hold a certain minimum percent in SPV
In case of PPP projects, other than regulatory requirement to hold certain minimum percent in SPV by sponsor – • Consolidated value of sponsor
holding shall be at least 25% of the value of units of InvIT or unit holders for not less than three years
• Where sponsor does not have a controlling interest in SPV and more than 50% of shareholding in the SPV, the sponsor shall enter into a bidding agreement so that the decisions are in compliance with the regulations and not against the interest of InvIT or unit holders
Sponsor’s holding in InvIT is not mandatory, if InvIT is proposing to invest in PPP projects, where the regulatory requirement requires sponsor to hold a certain minimum percent in SPV
Page 13
InvITs in India Comparative analysis of regulations
Particulars Draft regulations Final regulations Comments
Sponsor(s) qualifications
Minimum experience of 5 years in development of infrastructure or fund managements in infrastructure sector
Minimum experience of 5 years in development of infrastructure and has developed at least 2 projects
No change
Incase of PPP projects, sponsor shall mean the lead member of the concessionaire SPV
Incase of PPP projects, sponsor shall mean the infrastructure developer or SPV holding concession agreement
Now, Sponsor need not necessarily lead member
Investment Manager qualifications
Net worth of at least INR 5 crores in case of body corporate or a company or net intangible assets of INR 5 crores in case of a LLP
Net worth of at least INR 10 crores in case of body corporate or a company or net intangible assets of INR 10 crores in case of a LLP
Increased the minimum net worth requirement to encourage considerate competition
Minimum experience of 5 years in fund management/ advisory services/ development in infrastructure sector
Minimum experience of 5 years in fund management/ advisory services/ development in infrastructure sector
No change
2 or more key personnel, having more than 5 years’ experience in fund management/ advisory services/ development in infrastructure sector
2 or more key personnel, having more than 5 years’ experience in fund management/ advisory services/ development in infrastructure sector
No change
Page 14
InvITs in India Comparative analysis of regulations
Particulars Draft regulations Final regulations Comments
Trustee qualifications
Registered with SEBI and is not an associate of sponsor/ investment manager; or
Registered with SEBI and is not an associate of sponsor/ investment manager; and
Associate can not be Trustee
If it is an associate of sponsor/ Investment manager, it should have 50% of its directors as independent
Sufficient resources with respect to infrastructure, personnel etc. as specified by the board
Sufficient resources to perform duties
It is not a trustee of another InvIT or an Alternative Investment Fund engaged in infrastructure sector
This has been removed
InvITs – Major changes in regulations
Page 16
InvITs in India Major Changes
Particulars Draft regulations Final regulations Comments
Completed and Revenue Generated Projects
The assets of the Infrastructure Project had to be capitalised in the books of account of the SPV of the InvIT
This have been removed No capitalization requirements
Eligible Infrastructure Project
A Non-PPP project is an Infrastructure Project that has received all the requisite approvals and certifications for commencing construction of the project and has been rated by a credit rating agency
Now, A Non-PPP project will qualify as Infrastructure project, if all the requisite approvals have been received
No credit rating is required to qualify as eligible infrastructure project
Infrastructure It includes all infrastructure sub-sectors as defined by Cabinet Committee on Infrastructure vide Notification of Ministry of Finance dated March 1, 2012 and any amendments/additions made thereof
It includes all infrastructure sub-sectors as defined vide Notification of Ministry of Finance dated 7 October, 2013 and any amendments/additions made thereof
Now, hotels without specified category and convention centre to be included in the definition of infrastructure subject to minimum project cost. Please refer Annexure 1
Page 17
InvITs in India Major Changes
Particulars Draft regulations Final regulations Comments
Public listed InvIT
Minimum subscription from any investor in initial and follow-on offer shall be INR five lakhs
Minimum subscription from any investor in initial and follow-on offer shall be INR ten lakhs
Considering the InvIT is a new financial instrument, retail investor with sound financial background should invest
Infrastructure Project
Any project in infrastructure sector excluding any project which has either or both of the following attributes – • Revenues from the project are
treated as rental or leasehold income
• Immovable assets related to the project are treated as investments and not as fixed assets
Incase of hotels or hospitals – • Leasing of land on which such
hospital or hotel is located shall not be an infrastructure project
• Revenues generated from operation and management of a hospital or hotel shall be an infrastructure project
Any project in infrastructure sector. Please refer Annexure 1
Definition modified to include those infrastructure assets where revenue is earned from leasing/letting out
Page 18
InvITs in India Major Changes
Particulars Draft regulations Final regulations Comments
Privately offered InvIT
Required to mandatorily hold – • At least one post COD project • At least one pre COD project
This requirement has been removed
No requirement of necessary bundling of assets
Investment by publicly offered InvIT
Mandatory investment in minimum of two asset
This requirement has been removed
Considering the size of investment in infrastructure sector, one project may be enough for investment
Distributions made by InvIT
SPV/InvIT to distribute 90% of the net distributable income after tax
SPV/InvIT to distribute 90% of the net distributable cash flow
Higher distribution to investor
Incase of publicly offered InvIT, distributions shall be made every Quarter
Incase of publicly offered InvIT, distributions shall be made every six months
Distribution to be done half yearly
Incase of privately placed InvIT, distribution shall be made every six months
Incase of privately placed InvIT, distribution shall be made once a year
Distribution to be done yearly
Borrowings and deferred payments
The aggregate consolidated borrowings and deferred payments shall not exceed 49% of the value of the InvIT assets
The aggregate consolidated borrowings and deferred payments net of cash and cash equivalents shall not exceed 49% of the value of the InvIT assets
Clarity on how the consolidated borrowings should be calculated
Page 19
InvITs in India Major Changes
Particulars Draft regulations Final regulations Comments
Sale or purchase of infrastructure projects
In case of publicly offered InvITs, for purchase or sale of infrastructure projects, whether directly or through SPVs- • Full valuation of the project
shall be undertaken by the valuer
• In case of a purchase, the asset shall not be purchased at a value greater than 110% of the value of the asset as assessed by the valuer;
• In case of a sale, the asset shall not be sold at a value less than 90% of the value of the asset as assessed by the valuer
In case of publicly offered InvITs, for purchase or sale of infrastructure projects, whether directly or through SPVs, full valuation of the project shall be undertaken by the valuer, if • In case of a purchase, the asset
is proposed to be purchased at a value greater than 110% of the value of the asset as assessed by the valuer
• In case of a sale, the asset is proposed to be sold at a value less than 90% of the value of the asset as assessed by the valuer
Subject to the approval of the unit holders
This will allow for a transaction of buying and selling of a non related party asset at a price outside the limits as specified by the draft regulations
Sale of units to public
No regulations proposed Units may be sold to public if such units have been held by sellers for a period of at least one year prior to the filling of draft offer document including the period of holding of equity shares / partnership interest in SPV
Clarity on minimum holding period prior to sale of unit
InvITs – Tax Provisions
Page 21
Tax provisions announced in Budget 2014
Specific tax regime proposed for listed InvIT – to be effective from 1 October 2014
Sponsor
Capital gains at the time of exchange of shares in SPV with units of business trust to be deferred. Such capital gains proposed to be taxable only at the time of disposal of units by sponsor
* Period of holding of such units - period of holding of shares of SPV to be included
* Cost of acquisition of such units – cost of shares in specified SPV
Future sale of units by sponsor – Capital gains tax as well as STT (if sold on exchange) to levied [section 111A/10(38)]
SPV
No tax concession proposed at SPV level
Distribution of dividend to trust - subject to DDT
Interest paid to trust – allowed as deduction. No taxes to be withheld
InvIT
Income of trust
- Dividend and interest received by trust from SPV – Exempt
- Capital gains on disposal of assets - taxable in the hands of InvIT (effective tax rate of 20% for long term capital gains with indexation benefit and maximum marginal rate for short term capital gains)
- Any other income – taxable at maximum marginal rate
Interest component of income distributed by trust to the unit holders would attract withholding tax @ 5%/ 10% for non-resident and resident unit holders respectively. Tax may be deducted at higher rate of 20% in absence of PAN. Dividend & capital gains component of income distributed by InvITs to the unit holders will be exempt in the hands of the unit holders
InvITs to file return of income
Unit-holder
Interest income received by non-resident unit holders taxable at 5% concessional rate & at applicable rates for resident holders
Capital gains on sale of listed units of InvIT on the exchange to attract levy of security transaction tax at par with that of listed equity shares. Long term capital gains (where units held for more than 36 months) would be exempt and short term capital gains would be taxable @ 15%. Where sale of units is off the exchange LTCG taxable at 20% and STCG @ applicable rates
MAT applicable on interest income and capital gains on sale of InvIT units
Thank you
Page 23
Annexure - 1 Final Regulations - List of infrastructure sub sectors
Infrastructure (as per notification dated 7 October 2013 of Ministry of finance)
Transport
► Roads and bridges ► Ports1
► Inland waterways ► Airport ► Railway track, tunnels, viaducts, bridges2 ► Urban public transport (except rolling stock in case of urban road transport)
Energy
► Electricity generation ► Electricity transmission ► Electricity distribution ► Oil pipelines ► Oil/Gas/liquefied natural gas (LNG) storage facility3
► Gas pipelines4
Water sanitation
► Solid waste management ► Water supply pipelines ► Water treatment plants ► Sewage collection, treatment and disposal system ► Irrigation (dams, channels, embankments etc.) ► Storm water drainage system ► Slurry pipelines
1 Includes capital dredging
2 Includes support terminal 3 Includes strategic storage of crude oil 4 Includes city gas distribution network
Page 24
Annexure - 1 Final Regulations - List of infrastructure sub sectors
Infrastructure (as per notification dated 7 October 2013 of Ministry of finance)
Communication
► Telecommunication (fixed network)5
► Telecommunication towers
► Telecommunication & Telecom services
Social and commercial infrastructure
► Education institutions (capital stock)
► Hospitals (capital stock)6
► Three-star or higher category classified hotels located outside cities with population of more than one million
► Common infrastructure for industrial parks, SEZ, tourism facilities and agriculture markets
► Fertilizer (Capital investment)
► Post harvest storage infrastructure for agriculture and horticultural produce including cold storage
► Terminal markets
► Soil-testing laboratories
► Cold chain7
► Hotels with project cost8 of more than Rs 200 crores each in any place in India and of any star rating
► Convention centers with project cost8 of more than Rs 300 crores each
5 Includes optic fiber/cable networks which provide broadband/internet 6 Includes medical colleges, para medical training institutes and diagnostics centers 7 Includes cold room facility for farm level pre-cooling, for preservation or storage of agriculture and allied produce, marine products and
meat 8 Applicable with propective effect from the date of notification and available for eligible prospects for three years from the date of
notification; eligible cost exclude cost of land and lease charges but include interest during construction
Page 25
Annexure - 2 Definitions
Associate ► Any person who controls, directly or indirectly ► In case of a company or a body corporate, any person who is designated as promoter of the
company/body corporate and any other company/body corporate with the same promoter ► In case of an individual, any relative of the individual ► In case of a company or a body corporate or an LLP, its group companies ► Companies/LLPs under the same management ► In case of an InvIT, related parties to the InvIT ► Any company or LLP or body corporate in which the person or its director/partner hold, either
individually or collectively, more than fifteen percent of its paid-up equity share capital or partnership interest, as the case may be
Eligible infrastructure project
An Infrastructure Project which prior to the date of its acquisition by or transfer to the InvIT, satisfies the following conditions: ► For PPP projects:
► The Infrastructure Project is completed and revenue generating; or ► The Infrastructure Project is a pre-COD project
► In Non-PPP projects ► The Infrastructure Project has received all the requisite approvals and certifications for
commencing construction of the project
Infrastructure All infrastructure sub-sectors as defined by vide Notification of Ministry of Finance dated October 7, 2013 and shall include any amendments/additions made thereof
Infrastructure project
Any project in infrastructure sector
Page 26
Annexure - 2 Definitions
Special Purpose Vehicle
Any company or LLP: ► in which the InvIT holds or proposes to hold controlling interest and not less than 50% of the
equity share capital or interest; and ► which holds not less than 90% of its assets directly in infrastructure projects and does not invest in
other Special Purpose Vehicles; and ► which is not be engaged in any other activity other than activities pertaining to and incidental to
the underlying infrastructure projects
Completed and revenue generating project
An Infrastructure Project which prior to the date of its acquisition by or transfer to the InvIT, satisfies the following conditions: ► the Infrastructure Project has achieved the commercial operation date as defined under the
relevant project agreement including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders;
► the Infrastructure Project has received all requisite approvals and certifications for commencing operations; and
► the Infrastructure Project has been generating revenue from operations for a period of not less than one year
Sponsor Company or LLP or body corporate who sets up the InvIT and assigned as such at the time of application made to the Board and in case of PPP projects, shall mean the infrastructure developer or a special purpose vehicle holding concession agreement
Page 27
Annexure - 2 Definitions
Pre-COD project
An infrastructure project which : ► has not achieved commercial operation date as defined under the relevant project agreements
including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders; and
► has: ► achieved completion of at least 50% of the construction of the infrastructure project as
certified by an independent engineer of such that project; or ► expended not less than 50% of the total capital cost set forth in the financial package of the
relevant project agreement
Under construction project
Infrastructure project, whether PPP or non-PPP, which has not achieved commercial operation date as defined under the relevant project agreements including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders
Net Worth
Net worth‖ in relation to a company or a body corporate shall have the meaning assigned to it in or under sub-section (57) of section 2 of the Companies Act, 2013 As per sub-section (57) of section 2 of the Companies Act, 2013, net worth means – “The aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and Amalgamation”