As the capital market regulator, Security Exchange Board of India (SEBI) actively encourages setting of varied frameworks for investment in infrastructure sector so that lack of structures for financing of infrastructure is not an impediment for the development of the sector. Recently SEBI has made effort to boost investment in the infrastructure sector by issuing a consultation paper on infrastructure investment trusts in India and several financing/refinancing structures globally observed boosting infrastructure sector/ specific sub-sectors including business trust model in Singapore and Hong Kong, Master Limited Partnerships in the USA, various securitization structures, etc. SEBI has received various proposals for such Infrastructure Investment Trusts including bringing Infrastructure Investment Trusts as a Mutual Fund, having a separate set of Regulations for Infrastructure Investment Trust, bringing Infrastructure Investment Trusts under REIT framework, etc. SEBI suggested two ways to launch schemes under Infrastructure Investment Trusts i.e.
- through a mutual fund frameworkand
- through an independent framework.
As perthe first route proposed by SEBI, the sponsor of an Infrastructure Investment Trustshall act as an infrastructure developer or a special purpose vehicle (SPV), and each Infrastructure Investment Trust will need to have a mix of pre-completed projects and projects generating cash flows. There will be an independent engineer, project manager, advisory body and authority. Under this route Infrastructure Investment Trust will have to bundle portfolio of infrastructure projects. The Infrastructure Investment Trust can invest both in projects from its own group companies and those under other developers.Two or more developers can also jointly sponsor the creation of an Infrastructure Investment Trust. An Infrastructure Investment Trust will need to invest at least 65% of net assets of the scheme in equity shares of companies in line with equity-oriented mutual fund schemes.Just like real estate investment trusts (REITs – captured in our last month’s newslex), Infrastructure Investment Trusts will be required to distribute at least 90% of their net distributable income after tax to their investors. SEBIproposed that an Infrastructure Investment Trust will have to itself play an active role in development of the underlying projects.
After registration with SEBI, an Infrastructure Investment Trust shall raise funds by issuing units to investors through an initial offer and may subsequently raise further funds through follow-on offers. Infrastructure Investment Trusts shall be allowed to raise funds from both domestic and foreign investors.The scheme of an Infrastructure Investment Trust will be sold to the public by issuing units to investors through an initial offer, akin to an initial public offering.
Second route proposed by SEBI envisages a separate framework called SEBI (Infrastructure Investment Trusts) Regulations, with a broad structure with various categories depending on the nature of underlying projects, stage of construction, type of investors, etc. under which each Infrastructure Investment Trust could be classified into two categories based on the nature of projects under them. This route proposes that any pooling vehicle formed for the purpose of investment in the infrastructure sector can be included under the new regulations. SEBIconsultation paper stipulates that an Infrastructure Investment Trust may apply for registration either as a body to invest in multiple infrastructure projects or as one to invest only in year-old revenue-generating projects. The first category of Infrastructure Investment Trusts can raise funds only from institutional investors with the minimum subscription amount being Rs.5 crore. Under the second route, the Infrastructure Investment Trust may raise funds from any investor with a minimum subscription amount being Rs.10 lakh. In so far as the initial offering of any Infrastructure Investment Trust is concerned, under the second proposal, the size of the proposed projects must be at least Rs.1,000 crore and the minimum issue size for such Infrastructure Investment Trusts must be Rs.250 crore. Some of the advantages of this route are;
- the proposal allows for a broad framework encompassing multiple possible types of structures for investment in infrastructure sector.
- the framework also allows for adding of future new and innovative structures as may be required and
- this proposal also allows for targeting of specific incentives by government/regulators for the infrastructure sector in general or any sector/sub-sector in particular.
In order to discuss the implications, we have to wait for what the new SEBI (Infrastructure Investment Trusts) Regulations contain. However, this regulation alongwithREITs may be a boosting factor in the growth of Indian economy.
Foreign Companies under the New Companies Act 2013
For the foreign entities undertaking business in India, the Companies Act 2013 (New Act) contains provisions to regulate their activities in India. Prima facie, it may appear that these provisions are similar to the ones contained in the Companies Act 1956 (Old Act), however, these provisions are expansive in the New Act. The provisions under the New Act are discussed below:
Merger or amalgamation of company with foreign company
The New Act allows companies incorporated in India to merge with foreign companies. This provision sets aside the restrictions on cross-border mergers stipulated under the Old Act, which only permits a foreign company to merge with a company incorporated in India.
Section 234 of the New Act lays down that an Indian company need prior approval of the Reserve Bank of India, and the payment of consideration to the shareholders of the merging company in cash or in Depository Receipts or partly in cash & partly in Depository Receipts.
The compliances under the New Act including registration, maintaining books of account and audited accounts are almost similar to the ones prescribed under the Old Act.
Section 2 clause 41 of the New Act mandates that the Financial year shall be the year ending 31st March, however specific exemption is given to subsidiary of foreign company or holding of foreign subsidiary to change the financial year to some other period with the approval of National Company Law Tribunal.
The New Act provides that the foreign companies have an option to form private or public limited companies in India at their choice without any limitation which repeals the provision as stipulated under section 4(7) of the Old Act. Further, Chief Executive Officer and Chief Financial Officer has been defined in the New Act under section 2(51) and are covered in the category of key managerial personnel with wider responsibilities and liabilities.Section 137 of the New Act further mandates the consolidation of financial statement for all companies where a company has one or more subsidiaries whether Indian or foreign.
The New Act, under section 135 also requires every company, which has a net worth of 5 billion rupees (almost $82 million) or more; or a turnover of 10 billion rupees or more; or net profit of 50 million rupees or more during any financial year, to spend at least 2 percent of its average net profit earned during the three immediately preceding financial years, every year on social welfare programs.
Class action suits
Under the New Act, certain prescribed members or deposit holders have right to file damages against director whether Indian or foreigner, in case of unlawful or fraudulent actions as provided under section 245.
Invitation to Public
Unlike the Old Act which only permittedissue of shares and debentures, the New Act permits the entities incorporated outside India (as companies) to issue prospectus and invite public in India to subscribe to their securities subject to prescribed conditions. However, like the Old Act, the New Act prescribes penal consequences for non-compliance for the foreign entities. There has been a significant increase in the amount up to which penalty could be leviedunder the New Act. The New Act also prescribes imprisonment for officers of such foreign companies. Further, the New Act has omitted the safeguards for the persons responsible for issuing the prospectus from being liable to penal consequences arising out of non-disclosure/non-compliance as was stipulated under the Old Act.
The applicability of the ‘winding up’ provisions is extended to closure of place of business in India for foreign entities. Accordingly, closure of the place of business in India by any foreign company would require a prior approval from a Tribunal.
The aforesaid provisions are related to foreign companies having presence through physical office in India. However, the applicability of these provisions to foreign entities establishing a virtual presenceeither through electronic mode or through an agent is not clear. It remains unclarified as to what kind of agency relationship in India or what type of virtual presence in would constitute a place of business in India. Even the draft rules released by the Ministry of Corporate affairs have not clarified such issues.