Introduction:
SEBI had brought a Consultation Paper titled Consultation paper on Special Rights and Role of Sponsor in REITs and InvITs on May 16, 2023 [‘CP 2023’] proposing to introduce the concept of ‘nomination rights for unitholders. On receipt of public comments CP 2023 was taken up for discussion in SEBI board meeting on June 28, 2023. SEBI board at this meeting approved the proposal of nomination rights for unitholders.
Further Securities and Exchange Board of India vide its amendment notification Securities and Exchange Board of India (Infrastructure Investment Trust) (Second Amendment) Regulations, 2023 dt: August 18, 2023 amended Securities and Exchange Board of India (Infrastructure Investment Trust) Regulations, 2014 [‘InvIT Regulations’] to incorporate the concept of nomination by unitholders.
SEBI has now vided its circular dated September 11, 2023 [‘InvIT circular’] has inter-alia prescribed the manner of the nomination process which includes the process of nomination and eligibility criteria for the nominating unitholders as well as for the proposed appointee. InvIT circular has become effective from September 11, 2023, itself.
InvIT circular provides for as to who shall be eligible unitholders, eligibility criteria for nomination of unitholder nominee director, formulation of policy in relation to the qualifications and appointment criteria and evaluation parameters for unit holder director, timeline and process (first nomination after issuance of this circular and subsequent nomination on annual basis), withdrawal/change of nomination, vacation/removal of Unitholder Nominee Director and amendment to be made to trust deed and investment management agreement.
Immediate Actionable:
1. Formulation of Policy: The Board of Directors of Investment Manager are required to formulate and adopt a policy providing for qualifications, criteria for appointment, and evaluation parameters of individuals nominated for nominee director.
2. Website compliance: This policy shall also be made available on the website of the InvIT.
3. (1) Appointment process and timeline to be adhered to:
a) The Investment Manager [‘IM’] shall send a written intimation to all the unitholders within ten days from the end of September 30, 2023, requesting them to inform IM if they wish to exercise the right to nominate the Director.
b) Thereafter, eligible unitholder(s) who wish to exercise this right shall inform the IM through a written notice within ten days of receipt of the intimation from the Investment Manager.
c) The eligibility of a unitholder nominee director shall be confirmed by the IM, based on the evaluation done by the Nomination and Remuneration Committee (“NRC”) and/or the board of directors of the IM in line with the policy formulated in this regard, within ten (10) days of receipt of notice from eligible unitholder(s).
d) Once the eligibility of a unitholder nominee director is confirmed, the IM shall take necessary steps to complete the appointment of such director on the board of directors within thirty days from the date of such confirmation. The IM shall ensure that the appointment of the unitholder nominee director is following the requirements with respect to the composition of the board of directors under the InvIT Regulations and other applicable laws.
e) In case, the unitholder exercises the above right, the compliance with respect to the composition of IM needs to be checked as per InvIT Regulations. As per Regulation 4(2)€(v), the IM should have not less than half of its directors in case of a company or members of the governing board in case of an LLP as independent, therefore while appointing the nominee directors on the board of IM, the need for appointment of independent directors to be checked upon, on case-to-case basis. However, timeline for appointment of independent directors is not mentioned.
f) Further, if the candidate proposed is not eligible or not found suitable based on the evaluation done by the NRC and/or the board of directors of the IM in line with the policy formulated in this regard, the reasons shall be recorded in writing and shall be communicated by the IM to the eligible unitholder(s)within ten (10) days of receipt of notice from eligible unitholder(s). In such case, the eligible unitholder(s) may submit another candidate within a period of ten (10) days from the receipt of such communication from the IM.
3. (2) Reporting and monitoring: The IM shall within ten days from the end of each calendar month, review whether the eligible unitholder(s) who have exercised the board nomination right, continue to have/hold the required number of units of InvIT and make a report of the same which shall be submitted to the Trustee of InvIT.
For simplicity, below chart can be referred for process of appointment with timeline:
4. Amendment to the Trust Deed and Investment Management Agreement: In view of the Securities and Exchange Board of India (Infrastructure Investment Trusts) (Second Amendment) Regulations, 2023 notified on August 18, 2023, the trust deed and investment management agreement shall stand amended or be deemed to incorporate provisions to provide board nomination rights to eligible unitholder(s) in the manner specified in this circular. Further, the trustee and IM shall ensure that the trust deed and the Investment Management Agreement to provide for right to the eligible unitholder(s) of nomination and appointment of unitholder nominee director on the board of directors of IM.
Conclusion
Introduction of fit and proper criteria for potential board members is a welcome step in maintaining the integrity of board discussions. It ensures that the drive for inclusivity doesn’t undermine the quality of deliberations in board meetings.
This circular is coming from the background where SEBI welcomes the special rights pertaining to the representation on the Board of Investment Manager, however, it is also noteworthy that there are the instances wherein other special rights are given to certain unitholders, InvITs shall critically review continuation of such practices/structure.
*****
The article is written by Ms.Isha Kaushik – Manager and Mr. Saurabh Agarwal – Partner of MMJC!
Author Bio
