The Securities and Exchange Board of India (SEBI) has released a consultation paper outlining a regulatory framework for Restricted Return Infrastructure Investment Trusts (InvITs). This framework introduces a unique investment model aimed at balancing risk and return by incorporating structured limits on payouts.
Key Features of the Framework
Structured Return Mechanism: Unlike traditional InvITs, where returns are tied to the full performance of underlying infrastructure assets, Restricted Return InvITs offer:
- Downside Protection: A guaranteed minimum return (floor) for unitholders.
- Upside Cap: Limits on the maximum return investors can earn.
Excess returns beyond the cap are allocated to sponsors or pre-designated entities, reducing investor exposure to market volatility.
Sponsor Obligations: If returns fall below the guaranteed floor, sponsors or affiliated entities are required to compensate investors, ensuring the baseline return is met.
Targeted Investors: Restricted Return InvITs are designed exclusively for sophisticated investors with the financial acumen to understand the structured return mechanisms.
Investment will be restricted to privately placed InvITs with:
- A minimum asset value of Rs 50,000 crore.
- High entry thresholds, with a minimum investment and trading limit of Rs 500 crore.
Informed Participation: Investors must sign a waiver acknowledging their understanding of the return limitations, ensuring informed consent before participation.
Performance Evaluation and Credit Ratings: It is mandated for regular performance evaluations of InvIT assets.
- Sponsors or entities backing the downside protection must undergo credit rating assessments, which will be prominently disclosed in the placement memorandum.
- Risk disclosures will also be emphasized to provide clarity on potential investment outcomes.
Significance of the Framework
Risk Management for Investors:
- By introducing floor protection, the framework mitigates downside risks, providing a safety net for investors.
- The upside cap ensures reduced exposure to market volatility, appealing to risk-averse investors.
Sophisticated Investor Focus: The high investment thresholds and complex structure ensure participation by informed investors, safeguarding market integrity.
Transparency and Accountability:
- Credit ratings and detailed risk disclosures promote transparency, enabling investors to make informed decisions.
- Regular performance evaluations ensure accountability from sponsors and affiliated entities.