Change of Sponsor Amendment – Takeover Opportunities for InvITs?

As part of the several reform measures introduced to boost the economy and the capital-intensive infrastructure sector, the Securities and Exchange Board of India (“SEBI“) introduced the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations“). These regulations have been in effect since September 26, 2014 and are intended to facilitate a steady inflow of fresh capital by way of private and foreign investments in infrastructure investment trusts (“InvITs“).

One lacuna in the InvIT Regulations, which SEBI had not plugged through previous amendments, was the process for a change in, or induction of, a sponsor. While the InvIT Regulations laid down the requirements for a change in the investment manager and project manager, the requirements for a change in sponsor were conspicuously absent. Such is not the case with most other SEBI regulations, which in some way deal with changes to the sponsors or promoters, and therefore was a surprising omission on SEBI’s part. This gap led to the ambiguity around the process for changes to the sponsor, and also affected exit plans of sponsors who had already set up InvITs, or induction of potential strategic investors to fund the InvITs.

Induction and De-classification of the Sponsor

In a stream of recent, and welcome amendments to various SEBI regulations, in an attempt to address ongoing issues that had been vexing stakeholders, the InvIT Regulations have been amended on June 16, 2020 by the SEBI (Infrastructure Investment Trusts) (Second Amendment) Regulations, 2020[1] (“Amendment Regulations”). The Amendment Regulations now aim to address these issues, by detailing provisions relating to induction of a new sponsor and change in control of existing sponsors.

SEBI has introduced a concept of ‘inducted sponsor’ which is defined as, “any company or LLP or body corporate which has been inducted as a sponsor in accordance with sub-regulation (7) of regulation 22”.

Regulation 22(7) has been introduced to lay out the process for not only the induction of a sponsor, but also for a change in the sponsor or change in control of the sponsor.[2] This process requires:

(a) an approval from seventy five percent of the unitholders ‘by value’. It is also important to note that the approval will exclude units held by parties related to the transaction, essentially making this a minority approval (as the sponsor is likely to be disqualified from voting if it is a party to the transaction causing the change); and

(b) if the approval threshold of seventy five percent is not met, the proposed ‘inducted sponsor’ (or the newly controlled sponsor) shall provide an exit to dissenting unitholders by buying their units. SEBI is likely to prescribe the process for such exit.

SEBI has also introduced the process for de-classification of an existing sponsor. The new Regulation 7A allows a sponsor, who has been designated so for at least three years, to de-classify as a sponsor if its unitholding (along with associates) falls below 10%, if the investment manager is not controlled by the sponsor or its affiliates and if unitholder approval is obtained. The InvIT is required to make an application in this regard. Together with the induction of a sponsor, this provision allows the replacement of the sponsor who established the InvIT.

Questions unanswered

SEBI has left open the process of providing an exit to the dissenting unitholders, so we are yet to see the complete picture. Sponsors should hope that in anticipation of an exit, unitholders are not incentivized to reject approval in the first place, since only the dissenting unitholders are to be given an exit and that too only when approval is not received. This process is very different from a listed company, where the takeover regulations do not differentiate between the public shareholders (as there is no vote on the takeover).

The Amendment Regulations appear to have plugged a gap, but not without leaving some questions unanswered. Does providing an exit in case of a failure to obtain unitholder approval mean that minority unitholder approval is not mandatory, and the sponsor has the option to proceed with the proposed change anyway as long as it provides an exit? Typically, other legislations which provide for exit of dissenting shareholders (such as company law), do so where the approval for the resolution has been received. Also, has SEBI inadvertently applied these requirements to unlisted InvITs (a concept introduced recently) which do not have public unitholders?

Potential InvIT Takeovers

Some may ask why SEBI has prescribed a process of providing an exit, where unlike a promoter of a company, the sponsor of an InvIT has little role after the InvIT has raised funds (since the investment manager controls the activities). However, a large section of the investors who have been eyeing the infrastructure sector and InvITs will welcome this amendment.

These changes provide an investment opportunity to investors looking to take over existing sponsors, or enter the infrastructure sector themselves as ‘inducted sponsors’, and also provide a much-needed exit mechanism for existing sponsors who have set up the InvIT. Existing InvITs have seen a few investments, but due to the lack of sponsor change provisions until now, InvITs are yet to see large takeovers. We could expect to see some going forward.

Authors:
Pranav Atit, Senior Associate
Armaan Srinivasan, Associate

Footnotes:
[1] Securities and Exchange Board of India (Infrastructure Investment Trusts) (Second Amendment) Regulations, 2020 published on June 16, 2020 [No. SEBI/LAD-NRO/GN/2020/15]
[2] It has been clarified that a change in sponsor will occur whether or not there is an exit of the existing sponsor.

Date: June 25, 2020