Explained: Will restricted InvITs proposed by Sebi really give assured returns?

Under framework proposed by Sebi, this restricted InvIT should be available only to "sophisticated investors", therefore these InvITs may be permitted only for privately placed InvITs with higher minimum investment and minimum trading thresholds.

The market regulator has proposed a new asset in the form of restricted infrastructure investment trusts (InvITs). The Securities and Exchange Board of India (Sebi) proposed this through a consultation paper issued on October 30.

Here's a look at the new asset and whether it guarantees returns.

What are restricted InvITs?

They are InvITs in which the returns to investors are restricted or managed in exchange for an assurance of a minimum return. That is, the investor cannot make unlimited returns but can get the assurance that he/she will get some returns, independent of the InvIT's performance.

Why was it introduced?

Under the current InvIT structure, all unitholders are meant to benefit equally from the underlying asset. But during a routine inspection of all registered InvITs the regulator noticed that there were other kinds of arrangements in the market.

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InvITs generate income from infrastructure assets, which are owned through special-purpose vehicles. This income is then distributed to unitholders including sponsors (who created the InvIT).

The regulator noticed that SPVs of certain InvITs entered into special arrangements with sponsors or other pre-disclosed counterparties. Under this arrangement, a certain threshold was set on the return/income. Any return/income that crossed that threshold, i.e. any excess income above the threshold, was distributed among the sponsors or among other pre-disclosed counterparties.

These arrangements can also sometimes provide assured returns to the other unitholders. That is, a sort of floor is set on the returns. Even if the SPV does not generate any returns, this clause allows these unitholders to get a minimum income/return.

Thus, these arrangements allow for a cap and/or floor to the returns generated from each SPV.

Recognising the demand for such an arrangement, the regulator has proposed a framework to govern it.

The consultation paper noted that there are similar products in other global markets such as Defined Outcome ETFs or Buffer ETFs, which have gained popularity among rise-averse investors and those nearing retirement.

The consultation paper said that a similar product in InvITs that offers downside protection may appeal to investors looking for long-term, stable returns particularly given "the volatility often associated with infrastructure investments".

Under the proposed framework, a restricted InvIT could give downside protection on returns or upside restriction on returns or both.

Can everyone invest in them?

Under the proposed framework, this restricted InvIT should be available only to "sophisticated investors", therefore these InvITs may be permitted only for privately placed InvITs with higher minimum investment and minimum trading thresholds.

Regular InvITs can be publicly offered and listed, and privately placed and listed.

The value of assets may be a minimum of Rs 50,000 crore and the minimum investment lot and minimum trading lot (face value of each unit) may be Rs 500 crore.

Also, investors will need to sign a waiver saying that they have the ability to do due diligence on their investments independently and that they have understood the product. Since these InvITs units may be listed, such a waiver will need to be collected by the broker or the depository before the transfer of the units.

Will returns be fixed?

No, but returns will be capped. That is, if returns are in excess of a threshold, they will be distributed among sponsors or other pre-disclosed entities.

How will the new asset protect downside?

If there is any deficit in the returns generated, then the sponsor or sponsor group entity or pre-disclosed counterparties are required to bring in funds to ensure minimum returns to the unitholders.

Will it give assured returns?

If there is a downside protection offered by the restricted InvIT, then the sponsor or sponsor-group entities or other counterparties are expected to fund a minimum return to the unitholders. However, the consultation paper states that if these entities (sponsor or sponsor group or other counterparties) do not fulfil this contractual agreement then the InvIT may not be in a position to fulfil the downside protection on returns.

Therefore, the agreement must specify the clause of downside protection and, secondly, the sponsor or the counterparties who have agreed to meet the shortfall must meet the shortfall.