These changes include recognizing InvITs as ‘borrowers’ under the SARFAESI Act and credit facilities to InvITs as ‘debt’ under the RDDBFI Act, reflecting the government’s commitment to supporting infrastructure investment. By leveraging InvITs, India is poised to bridge the infrastructure funding gap and drive sustained economic progress, aligning with its broader development goals and infrastructure ambitions. In addition, it not only permits the overseas investors, like pension funds, for example, the Canada Pension Plan Investment Board (CPPIB), etc., to invest in InvIT projects but also facilitates the Indian promoters to churn the portfolio by generating cash and investing in the new projects.
Lenders in an InvIT
On October 14, 2019, RBI issued a notification on ‘Lending by Banks to InvITs’, permitting banks to provide credit facilities to InvITs, provided that the underlying special purpose vehicles (SPVs) are not facing financial difficulties in completing the pending projects and subject to the approval of the Board of Directors (BOD) of the bank.
Lenders, in extending credit facilities to InvITs enter into financing agreements that bind both parties. These agreements detail the facilities extended, mandatory prepayments of cash flows from certain transactions (such as proceeds from expropriation or takeover events by governmental authorities of InvIT assets or project SPVs), events of default, and the consequences of default. These agreements outline the actions banks may take in the event of a default by the InvIT, including terminating commitments under the facilities agreement, enforcing securities provided by the InvIT to secure the loan, and utilizing amounts in the InvIT’s or SPV’s escrow accounts. Lenders can enforce contractual remedies against an InvIT, but if such remedies are rendered impossible or if banks choose otherwise, they may proceed to court to recover the facilities extended.
Rights of Lenders against InvITs
InvITs may avail themselves of various loan facilities from banks, such as repaying the existing loans taken by SPVs incorporated into the InvIT structure, covering working capital requirements, or acquiring shares in other entities subject to the conditions prescribed by RBI. These facilities extended by banks must be safeguarded.
The SARFAESI Act, 2002, and the RDDBFI Act, 1993, were recently amended through the Finance Act, 2021, to incorporate the provisions protecting the interests of banks that have extended credit facilities to an InvIT. These amendments provide banks with judicial recourse to enforce their rights in the securities of InvITs and recover unpaid dues. Banks may proceed under Section 13 of the SARFAESI Act, 2002 that deals with ‘Enforcement of Security Interest’, or Section 19 of the RDDBFI Act, 1993 that deals with ‘Application to the Tribunal’, to enforce their security interests against the InvIT and recover pending dues.
InvITs have been classified as ‘borrowers’ under Section 2(f) of the SARFAESI Act, pursuant to Section 2(da) of the Securities Contracts (Regulation) Act, 1956, which defines ‘pooled investment vehicles’ as inclusive of a ‘business trust’ as defined in Section 2(13A) of the Income-tax Act, 1961 and registered with SEBI, i.e., InvITs. This definition includes any person or ‘pooled investment vehicle’ that has received financial assistance from a bank or financial institution. It also covers those who have provided guarantees, created mortgages, or pledged securities for such financial assistance, and any entity that becomes a borrower of an asset reconstruction company following the company’s acquisition of rights or interests related to such financial assistance.
Additionally, the facilities extended by banks are considered ‘debt’ under the SARFAESI Act, 2002, and Section 2(g) of the RDDBFI Act, 1993. This definition encompasses any liability (including interest) claimed as due from any person or ‘pooled investment vehicle’ by a bank, financial institution, or consortium thereof, during business activities. This liability can be in cash or otherwise, whether secured or unsecured, assigned, payable under a decree or court order, arbitration award, or mortgage, and legally recoverable on the application date. It also includes any unpaid debt securities remaining after a ninety-day notice period served upon the borrower by the debenture trustee or other authority in favor of whom the security interest is created.
However, while these amendments have strengthened the legal recourse available to lenders, the National Monetization Pipeline Volume I: Monetization Guidebook, published by NITI Aayog on August 23, 2021, highlights an important caveat. According to the guidebook, since InvITs are not recognized as ‘legal persons’ under existing regulations, the Insolvency and Bankruptcy Code (IBC) regulations are not applicable to financial assistance extended to InvITs. This means that the lenders currently lack a formal process for recourse to project assets through IBC mechanisms or the ability to invoke key provisions under IBC, such as the powers granted to the lenders as a part of the Committee of Creditors (CoC) under Section 28 of IBC during the corporate insolvency resolution process (CIRP) to change the management of the corporate debtor (CD). Evidently, a similar remedy, such as a change in sponsor of the InvIT or transfer of assets, remains unavailable to the lenders.
Therefore, despite the protections provided under the SARFAESI Act and the RDDBFI Act, the absence of IBC provisions limits the comfort level for investors. Though it is observed that lenders do have recourses available, there is yet to be a judgment or order on the enforcement rights of lenders under the SARFAESI Act and the RDDBFI Act. Hence, the effectiveness and practical implications of the identified rights are yet to be tested in the court of law.
Encouragement to Investors: Crucial
InvITs have been conceptualized to encourage investors to participate in the infrastructure development of the country. Despite their potential, InvITs are a relatively novel concept, and several issues need to be addressed. One such issue is the protection of the rights of the lenders within an InvIT. Recently, the RBI’s permission for bank lending to InvITs has highlighted the importance of safeguarding these rights. The recent amendments represent a significant step forward in protecting lender interests and ensuring the viability of InvITs as a financing tool. Nevertheless, the exclusion of InvITs from IBC regulations indicates a need for further reforms to create a more comprehensive legal framework. Incorporating InvITs into IBC proceedings will allow leeway to investors in securing an additional degree of protection and route in asset recovery, increasing the allure towards InvITs. However, the practical ramifications and efficacy of the revisions in judicial forums need to be explored, this shift in the lending landscape is expected to benefit investment vehicles as well as lenders. Nevertheless, InvITs still have a long way to go in fully achieving their intended purpose, and broader participation across various sectors is needed to effectively establish and grow InvITs.