SEBI’s new InvIT Playbook: What is the word on the street about the new draft consultation paper?

InvITs can invest in SPVs, either directly or through HoldCos, which must normally maintain at least 90 per cent of their assets in infrastructure projects. When a concession agreement expires or is terminated, an SPV no longer meets this requirement, yet it often cannot be wound up immediately because it must continue handling statutory and contractual obligations such as tax assessments, GST matters, litigation, and defect liability. This creates regulatory uncertainty regarding their continued qualification as SPVs under InvIT Regulations.

To resolve this, SEBI has proposed broadening the SPV definition under the InvIT Regulations so InvITs may continue holding these entities even after project reversion. It is proposed that the Investment Manager exit the SPV or ensure it acquires a new infrastructure project within one year of the later of: concession expiry, or resolution of claims or litigation, or completion of defect liability. InvITs must also provide detailed annual disclosures covering SPV financials, contingent liabilities, and their exit strategy. This is a welcome step, as several SPVs nearing concession expiry still face pending tax or contractual disputes. It removes pressure on the InvIT to prematurely settle issues or sell entities with contingent assets or liabilities at a discount, enabling more efficient resolution to matter.

InvITs are currently allowed to invest in liquid mutual fund schemes only if they have a credit risk value that is at least 12 and fall under Class A-I in SEBI’s Potential Risk Class (PRC) matrix. Industry associations have highlighted that only a handful of schemes meet this criterion, limiting the investment opportunities.

To address this issue, SEBI has proposed amending the conditions to allow InvITs to invest in liquid mutual fund schemes with a credit risk value of 10 or above, thereby covering Class A‑I and Class B‑I. This widens the eligible universe and gives InvITs better cash‑management flexibility without compromising on relatively conservative risk parameters.

Under current regulations, publicly listed InvITs may invest up to 10 per cent of their asset value in pure greenfield, under‑construction projects as part of the 20 per cent permissible non‑core bucket. Privately listed InvITs, however, are not allowed any allocation to such projects, creating an inconsistency.

SEBI now proposes to allow privately listed InvITs to invest in greenfield projects within the 20 per cent non‑core bucket, subject to a cap of 10 per cent of total asset value. The core requirement–investing at least 80 per cent of assets in completed, eligible infrastructure projects would remain unchanged.

Investors in privately listed InvITs are largely institutional, unlike public InvITs that attract retail investors. Developers and institutions currently warehouse under‑construction assets in parallel structures and transfer them to private InvITs post‑completion due to regulatory constraints. The proposal aims to create a level playing field between private and public InvITs, but their investor risk profiles differ. While the recommendation enables privately listed InvITs to hold some greenfield projects, SEBI could have permitted a higher threshold given their investors’ higher risk appetite. This would augment new infrastructure creation and attract institutional capital at earlier stages.

SEBI InvIT regulations currently allows InvITs with net borrowings above 49 per cent of asset value to raise additional debt only for acquiring or developing infrastructure projects. SEBI proposes to amend the regulation to also allow specified purposes such as capital expenditure to enhance performance or capacity, major maintenance for road projects as per concession agreements, and refinancing of debt originally taken for such uses. Again, this proposal takes away one of the significant issues faced by InvITs, which was refinance of existing loan facility at the SPV level post taken over by InvITs.

SEBI’s proposals can thus be viewed as targeted regulatory changes addressing operational friction without compromising investor protections. The Infrastructure sector’s reaction is largely constructive: SEBI’s proposals are seen as clinical fixes that could reduce friction, increase ease of operations, broaden investible options, and align financing tools with the real‑world lifecycle of infrastructure assets without materially weakening prudential safeguards. On an overall basis, these are welcome recommendations and would go a long way in strengthening InvITs platform as an attractive option for many developers and investors.