Securities and Exchanges Board of India on May 28, 2024, released a framework according to which privately placed infrastructure investment trusts (InvITs) can issue subordinate units.
What Are Subordinate Units?
The subordinate units are created primarily to bridge the valuation gaps arising from differences in the perception between a sponsor and investor in the valuation of an asset. Sebi had earlier proposed that there should be an upper ceiling on the number and value of subordinate units issued as it felt that these valuation gaps will anyway not be too wide.
The framework lays that subordinate units can only be issued to the sponsor, its associates, and the sponsor group, carrying inferior voting rights compared to ordinary units. Sebi said," The subordinate units shall be issued only to the sponsor, its associates and the sponsor group and shall be deemed to be a part of the consideration for the acquisition of the infrastructure project from such sponsor, its associates and the sponsor group". Further, it states that the amount of subordinate units issued at the time of acquisition of the project should not be more than 10 per cent of the acquisition price of the infrastructure project.
Sebi's Framework
To prevent excessive issuances of subordinate units, the framework has provisions to ensure risk mitigation. Sebi clarified that subordinate units would only be issued by a privately placed InvIT upon acquisition of an infrastructure project.
The Securities and Exchange Board of India (Sebi) has amended the regulations governing InvITs to the effect that an InvIT cannot raise funds through public issues if any subordinate units have been issued and are outstanding. An InvIT can issue subordinate units up to 10 per cent of the total outstanding ordinary units issued by the same InvIT. Unitholders holding at least 10 per cent of the total outstanding units can nominate one director on the board of directors of the Investment Manager.
The price of subordinate units shall be determined according to the pricing guidelines applicable to the issuance of ordinary units. Such units will not carry any voting rights or distribution rights and need to be issued in a dematerialised form with an International Securities Identification Number, distinct from that of the ordinary units. The subordinate units would be listed on a recognised stock exchange after their reclassification into ordinary units.
"The subordinate units may be issued by way of an initial offer or any offer subsequent to the initial offer, either along with the issue of ordinary units or without the issue of ordinary units," the regulator said. The minimum time-period between the issuance of subordinate units and the entitlement date for reclassification of the subordinate units to ordinary units would be three years, the release said.
