SEBI allows InvITs to issue subordinate units

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