Summary: Public listing changes the information, reporting and compliance processes required of an Infrastructure Investment Trust (InvIT). Before listing, the compliance team must ensure that information originating from the trust, holding companies, SPVs and project teams is complete, consistent and capable of being reported within applicable timelines. Financial reporting must be aligned with the applicable public-issue route, including the different requirements for initial and follow-on offers and the possible need for pro forma financial information following material acquisitions, disposals or restructuring. Valuation processes must be coordinated between project teams, finance and valuers, while Net Distributable Cash Flows (NDCF) require reliable information flows and reconciliation between SPVs, holding companies and the trust. Borrowings and deferred payments must also be reviewed on a consolidated basis, including lender restrictions, security arrangements and conditions affecting distributions or future financing. Equally important is a reliable system for identifying material developments at project, SPV and holding-company level and escalating them to the investment manager for assessment and timely disclosure. Contract terminations, covenant invocation, concession amendments, regulatory proceedings and operational disruptions may all require prompt internal escalation. Confidential information and market communications must also be appropriately controlled. Accordingly, preparation for public listing requires the compliance team to coordinate finance, legal, operations, project teams, valuers and underlying entities and to test these systems before filing.
Preparing an InvIT to Operate Like a Public InvIT
Introduction:
Public listing changes the way an InvIT is required to collect, verify and report information. Once an InvIT approaches public investors, financial information, valuations, distributions, borrowings and material developments must be supported by reliable internal processes and timely flow of information from the underlying entities. This requires preparation much before listing. The compliance team must ensure that information originating from the trust, holding companies, SPVs and project teams is complete, consistent and capable of being reported within the applicable timelines.
This article discusses the operational preparedness required before public listing, particularly in relation to financial reporting, valuation and NDCF, borrowings and lender arrangements, and the system for identifying and disclosing material developments
1. Align financial reporting, valuation and distribution processes
The next stage involves bringing the financial information of the trust and its underlying entities into alignment. The compliance team must coordinate with the finance team, auditors and valuers to ensure that information relating to the trust, holding companies and SPVs is complete and consistent.
Chapter 3 of SEBI’s Master Circular prescribes the financial information required in the offer document. Importantly, the nature of financial information differs depending on the public-issue route.
For an initial offer, paragraph 3.2.1 requires disclosure of audited combined financial statements. For a follow-on offer, paragraph 3.2.2 requires audited consolidated financial statements, with the separate audited financial statements made available on the InvIT’s website. These differences must be considered when planning the financial-reporting exercise for an IPO or conversion.
The compliance team must also examine whether acquisitions, disposals or restructuring transactions affect the financial information proposed to be presented. For example, where an InvIT has acquired a material SPV after the latest financial reporting period, the team must assess whether pro forma financial information is required under the applicable offer-document framework.
Valuation and distribution controls
Regulation 21 governs valuation requirements. The compliance team must coordinate with the valuer and finance team to ensure that the required valuation exercises are completed, relevant information is made available and the reports are considered and disclosed in accordance with the applicable requirements.
For example, the valuation of a toll-road asset may rely on traffic projections, concession tenure and other operating assumptions. The compliance team must ensure coordination between the project team, finance team and valuer so that the underlying information is consistent with the information included in the offer document.
The preparation must also cover Net Distributable Cash Flows (NDCF). Regulation 18 governs the applicable distribution requirements, while paragraph 3.19 of SEBI’s Master Circular, as amended, provides the framework for NDCF calculations. The compliance team should coordinate with finance to establish how cash-flow information moves from SPVs and holding companies to the trust, how adjustments are calculated and how distributions are approved and reconciled with the financial statements.
The objective is to ensure that the financial information, valuation reports, distribution records and statements made in the offer document are supported by consistent underlying data.
2. Examine borrowings and lender arrangements
Financial readiness also requires a consolidated review of the borrowings of the trust, holding companies and SPVs. The compliance team must ensure that the borrowings and deferred payments by InvITs are in accordance with Regulation 20, and should coordinate with finance to examine the consolidated leverage position and any approvals or other requirements arising under the applicable borrowing framework.
Similarly, an acquisition financed through borrowing may involve restrictions on distribution of cash flows or creation of further security. These conditions must be examined against the proposed issue structure, utilisation of proceeds and post-listing financing arrangements.
3. Establish a system for identifying and disclosing material information
Public listing requires the InvIT to have a reliable system for identifying developments and making timely disclosures. Regulation 23 of the InvIT Regulations governs disclosures, including the obligation to disclose information having a bearing on the operation or performance of the InvIT. Chapter 4 of SEBI’s Master Circular supplements this framework by prescribing continuous disclosures and compliances.
The compliance team must ensure that information originating at the project, SPV or holding-company level reaches the investment manager in time for assessment and disclosure. For example, an SPV may receive a termination notice from a concessioning authority, experience a major operational disruption or become subject to a significant regulatory proceeding. Such information may initially be available only with the project manager, operations team or local management.
Unless a proper reporting system exists, the compliance team may become aware of the development only after a substantial delay. The disclosure process should therefore clearly establish the responsibility for identifying events, internal reporting timelines, assessment of materiality, approval of disclosures and subsequent updates.
Contractual oversight should also form part of this reporting arrangement. For instance, the legal or operations team should inform the compliance team when a material contract is terminated, a lender invokes a covenant, a concession agreement is materially amended or a contractual dispute results in a notice or order. The compliance team can then assess the disclosure implications under the applicable InvIT framework.
The information-sharing process should extend to sponsor-group entities where developments concerning them are relevant to the InvIT’s applicable disclosure obligations.
Controls over confidential information and market communications must also be examined. Where an InvIT operates a unit-based employee benefit scheme, Regulation 17P specifically applies the SEBI (Prohibition of Insider Trading) Regulations, 2015 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 to the persons and entities specified in that provision.
Before filing, the disclosure system should be tested using practical situations to determine whether the information can actually be identified, escalated, assessed and approved within the applicable timelines.
Conclusion
For a public InvIT, compliance ultimately depends on how reliably and quickly information moves from the trust, holding companies, SPVs and project teams to the investment manager. Financial reporting, valuation, NDCF, borrowings and material-event disclosures may be governed by different requirements, but they all depend on the same underlying information being complete, consistent and available on time.
The compliance team therefore has an important role in bringing together inputs from finance, legal, operations, project teams, valuers, SPVs and holding companies, and ensuring that the internal processes supporting these compliances are properly coordinated.
Building and testing these systems before filing is therefore an important part of preparing an InvIT to operate as a public InvIT.
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The article is written by CS Rutuja M Umadikar
