Summary: An Infrastructure Investment Trust (InvIT) combines the traditional trust model with a professionally managed investment and operational structure. Like a conventional trust, it involves a settlor or sponsor, a trustee, beneficiaries represented by unitholders, and assets held for their benefit. However, infrastructure investments also require specialised management and supervision. The InvIT framework therefore operates through two interconnected structures: an investment structure that determines how infrastructure projects are held and a functional structure that allocates management responsibilities among the sponsor, trustee, investment manager and project manager. Infrastructure assets may be held through Special Purpose Vehicles (SPVs), either directly or through an intermediate Holding Company (HoldCo). The HoldCo layer was introduced by SEBI following industry representations and consultation to accommodate existing infrastructure ownership structures. The functional framework separately provides for investment management, project operations and trustee oversight through regulated appointments and contractual arrangements. Together, these arrangements enable infrastructure projects to be held for unitholders while providing professional management, governance and regulatory supervision.
Introduction
As per the traditional trust law, a trust is an obligation to hold a property of one person (settler of the trust) by other person (trustee), in trust for the benefit of the third person (beneficiary). Therefore, it can be said that the trust model originally aimed at safekeeping of properties and the rights attached to them.
However, while a trust structure is well suited for holding investments, it does not by itself provide a framework for professionally managing a business. The structure of an Infrastructure Investment Trust (InvIT) has therefore been designed to combine these two requirements. It uses the traditional trust structure for holding infrastructure investments and, at the same time, creates a separate functional structure for professionally managing the InvIT and its underlying infrastructure projects to earn income from them. In this article, we shall understand how these two aspects come together in the structure of an InvIT.
2 Facets of InvIT structure
Although an InvIT is structured as a business trust, it retains the basic features of a trust: there is a settlor/sponsor, a trustee, beneficiaries in the form of unitholders and property held in trust for their benefit. However, an InvIT also needs a framework for managing investments and operating the underlying infrastructure projects.
Accordingly, the structure of an InvIT can broadly be understood from two perspectives—its investment structure, which explains how the infrastructure assets are held, and its functional structure, which explains how the InvIT and its underlying assets are managed and supervised
Investment structure
An InvIT, as SEBI calls it, is a pooled investment vehicle. It pools money from investors through issue of units, buys an infrastructure or real estate project from a developer and holds it through a special purpose vehicle (SPV), manages that project through Investment manager in order to earn income from it, and then distributes the income in the form of distributions to the investors from whom it had collected money.
For example, assume that ABC Ltd. owns an infrastructure project through a special purpose vehicle, SPV Ltd. ABC Ltd. sets up ABC InvIT and transfers the requisite shareholding and control in SPV Ltd. to the InvIT. Since SPV Ltd. continues to hold the infrastructure project, the acquisition of SPV Ltd. brings the underlying project within the investment structure of ABC InvIT.
While settling the trust as InvIT, ABC Ltd. also appoints PQR Ltd. as the Trustee of ABC InvIT through trust deed forming the trust. The InvIT thereafter raises funds from investors through the issue of units and deploys such funds towards acquisition of the SPV. Income generated from the underlying infrastructure project ultimately flows through the InvIT structure for distribution to the unitholders
In this structure, ABC Ltd., which sets up the InvIT, acts as the settlor and is referred to as the Sponsor under the InvIT Regulations. PQR Ltd. acts as the Trustee and holds the assets of the InvIT (acquired SPV) in trust for the benefit of its beneficiaries. The investors who hold units of ABC InvIT are its unitholders and constitute the beneficiaries of the trust
Following can be the pictorial representation of the investment structure.
Unitholders including sponsor
↓
InvIT
↓
SPV
↓
Infrastructure Project
HoldCo layer
During 2015–16, market participants represented to SEBI that the InvIT framework should permit an additional layer between the InvIT and the underlying SPVs. The representation reflected existing infrastructure ownership structures in which project SPVs were often held through an intermediate holding company. Following public consultation and consideration of the implications under other applicable laws, SEBI introduced the concept of a HoldCo into the InvIT framework.
Post insertion of the HoldCo layer, in our above example, the structure will be like, ABC InvIT holds majority shares and controlling interest in HoldCo ltd and HoldCo ltd in turn holds the majority shares and controlling interest in SPV ltd and SPV ltd holds the actual infrastructure project.
Following is the pictorial representation of InvIT structure having HoldCo layer.
Unitholder including sponsor
↓
InvIT
↓
HoldCo
↓ ↓ ↓
SPV 1 | SPV 2 | SPV 3
The HoldCo layer is optional, and its use depends upon the structure of the relevant InvIT and its underlying assets. A HoldCo may, for instance, be used as an intermediate entity for holding multiple project SPVs, particularly where the infrastructure portfolio already follows such a corporate structure or where commercial, financing or contractual considerations make such a structure appropriate.
Functional structure
While the trust structure is well suited for holding assets for the benefit of beneficiaries, it does not possess the same internal managerial framework as a company. For example, a trust does not ordinarily have a board of directors or a comparable corporate management structure responsible for conducting its business.
in order to solve this difficulty, SEBI has designed through InvIT regulations, a concept called parties to InvIT. These parties are professionally managed companies who take care of day-to-day business of the trust and other related matters. Such parties to InvIT include,
- Sponsor,
- Trustee,
- Investment Manager (IM) and
- Project manager (PM)
(a) Sponsor: The Sponsor is the person who sets up the InvIT and provides the starting point for creation of the trust structure. In many cases, the Sponsor is also responsible for contributing or facilitating the transfer of the initial infrastructure assets to the InvIT structure.
(b) Trustee: The Trustee holds the assets of the InvIT in trust for the benefit of the unitholders. It also performs an important oversight function by monitoring the activities of the Investment Manager and ensuring compliance with the requirements applicable to the InvIT.
(c) Investment Manager: From a functional perspective, the Investment Manager performs a role broadly analogous to the management function performed by a board of directors in a company. It is responsible for managing the affairs of the InvIT and taking decisions relating to investments, acquisitions and other matters, while also ensuring governance and regulatory compliance.
(d) Project Manager: The Project Manager is responsible for the operation and management of the underlying infrastructure project, rather than for management of the InvIT itself.
Functional Structure through the Lens of the Traditional Trust Model
As per the traditional trust structure, there is no provision for appointment of entities like investment manager or project manager etc. and the duty to look after investment and day-to-day management of trust property is that of the trustee. However, as per section 47 of the Indian Trust Act and regulation 9(3 &4) of InvIT regulations, the trustee has the power to delegate some of its duties subject to conditions and limitations.
If we look at functions of parties to InvIT against functions of trustee under trust Act, it is seen that the trustee’s function of maintaining the trust property, its investment etc. is done by IM and PM in consultation with the trustee and the trustee is expected to oversee all these activities. These functions are assigned to IM and PM by the trustee through Investment management agreement and project management agreement respectively.
As per the InvIT regulations, the trustee appoints the investment manager and deligates its function of managing the trust property to IM. Thereafter IM appoints the PM in consultation with trustee and delegates its function of looking after day-to-day management of project to PM through project management agreement.
Thus, the Investment Manager and Project Manager are additional elements introduced by the InvIT framework to enable a traditional trust structure to function as a professionally managed investment vehicle. Their respective responsibilities arise from the InvIT Regulations as well as the contractual arrangements governing their appointment, with the Trustee continuing to exercise the oversight contemplated under the regulatory framework.
Conclusion
The InvIT framework is therefore a combination of the traditional trust model and a modern business structure. While the investment structure determines how infrastructure assets are held—directly through SPVs or through an intermediate HoldCo—the functional structure distributes the responsibilities of managing and operating those assets among the Trustee, Investment Manager and Project Manager. Together, these two structures enable a trust, which by itself does not have a conventional corporate management framework, to function as a professionally managed investment vehicle.
Among the various elements of this structure, the HoldCo layer is particularly interesting. Unlike the basic Trust–SPV structure, the HoldCo was not contemplated as part of the original InvIT framework and was subsequently introduced by SEBI following representations from market participants. The regulatory evolution of this layer, the reasons behind its introduction and the manner in which it is being used by InvITs today are examined in the next article.
Rutuja Umadikar- Deputy Manager
