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Subordinate units are the units issued to the sponsor for the valuation gap if agreed upon by the investors/unitholders.
SEBI has released the framework for the issuance, transfer and reclassification of subordinate units of InvITs. Here are the details of this framework:
Issuance of subordinate units
- The subordinate units can be issued by a privately owned InvIT after acquisition of an infrastructure project
- The number of subordinate units issued at the time of acquisition of an infrastructure project should not exceed 10% of the total outstanding ordinary units issued by the InvIT
- The subordinate units will only be issued to the sponsor, its associates and the sponsor group
- These units will not carry any voting or distribution rights
- Subordinate units can be issued by an initial offer or any other subsequent offer along with ordinary units or separate from them
- Issuance of subordinate units after the initial offer will require approval of unitholders with at least one and a half times votes in favor of issuance than against it
- The price of the subordinate units will be decided based upon the pricing guidelines applicable for issuance of ordinary units
- The investment manager will take an approval from the recognized stock exchange before the reclassification of the subordinate units into ordinary units
- The terms and conditions of the subordinate units should not be varied after their issuance
Transfer of subordinate units
- The subordinate units will be locked in for at least 3 years till their reclassification into ordinary units
- These units cannot be transferable to any person except the sponsors, its associates and the sponsor group entities
- In case of change of sponsor, the outgoing sponsor should transfer the subordinate units held by it to the new sponsor, its associates or sponsor group
Reclassification of the subordinate units
- If the performance benchmark is achieved at the end of the entitlement date, the subordinate units will be reclassified into ordinary units either together or in parts
- If the performance benchmark is not achieved at the end of the entitlement date, the subordinate units will be extinguished without any payment to their holder
- The board of directors of the investment manager will decide whether the subordinate units should be reclassified or extinguished and pass a resolution making the recommendation to the trustee