Nayonika Sharma and Morvi Sharma
I. Introduction
On February 5, SEBI released Consultation Paper titled “Measures Towards Ease of Doing Business for REITs and InvITs,” proposing four amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014. The proposals are based on recommendations of the Hybrid Securities Advisory Committee [“HYSAC”].
This blog contends that, while the current proposals endeavor to resolve the existing regulatory ambiguities and gaps, they still need some major changes. When compared with jurisdictions such as the United Kingdom, United States, Singapore and Japan, SEBI has adopted a far stricter rule-based framework which may further create a hindrance in providing a proper and effective solution. This piece critically analyzes all four proposals and their market and regulatory impacts. It compares them with foreign jurisdictions and further provides recommendations that may be incorporated to achieve better results and provide a more structured and streamlined regulations.
II. SPVs Post End of Concession Period
As per Regulation 2(1)(zy) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”), an SPV is required to hold at least 90% of its assets in infrastructure projects. A recurring complication arises upon the expiry of concession period. While the project may be completed, the SPV may still exist for residual obligations such as defect liabilities, pending litigations, indemnity claims, tax liabilities and other obligations. In such a situation, though the SPV might no longer fall within the definition provided in the regulations, its continued existence may still be a commercial necessity.
The current proposal aims to expand the purview of the definition of an SPV, allowing it to retain its status for a period of up to one year post the expiry of concession period, subject to certain conditions. While the measure does provide certain relaxation, it fails to address the commercial realities of infrastructure assets. Post concession obligations continue for a prolonged duration, especially in the case of long term infrastructural projects and restricting the post concession period to just one year time frame remains grossly inadequate. Moreover, requiring the winding up of SPVs within the prescribed time limit may also result in sales of assets below the market value which may ultimately harm the very unit holders and investors that SEBI seeks to protect.
Contradictory to this, in countries like United Kingdom and Singapore a more practical and flexible approach has been adopted. Unlike SEBI, the UK’s Private Finance Initiative framework permits the SPVs to exist as separate and perpetual legal entities post concession period by making prescribed disclosures from time to time without worrying about asset composition requirements. Similarly, under the Business Trustframework of Singapore, the trustee managers are vested with broad discretion to retain residual entities such as SPVs, to ensure that the post- project obligations are carried in a systematic and effective manner with appropriate procedures and oversight. Thus, while the fully established jurisdictions like these acknowledge the need for treating SPVs as functional entities rather than imposing stringent timelines, SEBI’s approach lingers behind and fails to resolve the underlying issue completely. Such entrenched reliance on rigid timelines makes it harder to manage infrastructure assets effectively over their full lifecycle. Crucially this reflects a broader limitation with SEBI’s approach, which remains excessively reliant on strict rules rather than evolving with the commercial realities.
III.Expanding Scope of Liquid Mutual Fund Schemes
REITs and InvITs are permitted to invest only up to 20% of their unutilized funds in Liquid Mutual Fund schemes. More specifically, such investments are restricted to schemes that are classified as Class A-1 and have a Credit Risk Value (CRV) of 12. Largely, only 9 out of the 38 mutual fund schemes qualify under the class A- 1 category and most of these schemes manage relatively small amount of money. This significantly restricts the choice of investment options available to REITs and InvITs, as it leaves them with very eligible schemes to invest in. Consequently, this leads to concentrated portfolios and increased investment risk due to lack of diversification. To address this issue, the current recommendation seeks to expand the scope of permissible investments for REITs and InvITs. It proposes to reduce the CRV threshold from 12 to 10, thereby bringing both class A-1 and Class B-1 schemes within its ambit.
While the inclusion of AA rated instruments may initially appear to increase the credit risk but the actual impact is much more complex and depends on market conditions. In normal market conditions the AA rated securities are usually stable, therefore associated credit risk is relatively manageable. Whereas in the bullish market situations, lower rated instruments are often the first to experience liquidity constraints, and prices may fall sharply.
Thus, the proposal does not eliminate the risk; but merely substitutes the concentration risk with greater credit and liquidity risk, instead of meaningfully reducing overall risk exposure. Additionally, ambiguity remains as to how this additional exposure will be monitored and managed. Since the proposal does not clearly stipulate the framework and mechanism for the additional risk management, it raises significant concerns about the adequacy of safeguards for increased exposure to lower- rated securities. Many newly eligible liquid funds function in smaller asset bases, which can be concerning, especially with regard to governance and overall stability of the investment portfolios. In this context, the question of fund quality and scale yet remains unaddressed. Further, the complete absence of prescribed minimum AUM requirement makes the proposal somewhat incomplete as such thresholds are essential to ensure more balanced and efficient portfolio allocation.
The placement of liquid surplus by REITs and InvITs in India continues to be governed by the PRC matrix (Permissible Risk Category), which is relatively conservative when compared with other jurisdictions. In the UK, under the FCA framework, Long-term asset funds (LTAFs)are managed by the LTAF manager, without any such prescribed matrix, which thereby enables liquidity optimization and better returns prospects. Similarly, in the US, such registered funds are required to maintain sufficient liquidity, allowing them to invest in high-yield liquid instrument while still ensuring overall liquidity requirements. Against this backdrop, SEBI’s proposed relaxation offers only limited relief. By continuing to stick to a cautious, rule-bound framework, it does not allow the benefits of a broader investment scope to be realized. Moreover this approach reflects wider reluctance in moving towards a principles-based regulatory approach that balances flexibility with accountability.
IV. Private INVITs Investment In Greenfield Projects
When it comes to privately listed InvITs, they must invest at least 80% of their assets in eligible infrastructure projects that meet the 50-50 test.[1] Greenfield projects do not meet this criterion and are therefore excluded from the remaining 20% investment allocation, leaving privately listed InvITs with no avenue to invest in Greenfield projects. The proposal permits this type of InvIT to invest up to 10% of their asset value in under-construction or Greenfield Projects. While the proposal seeks to broaden the investment options, it simultaneously creates larger risks concerning investor protection. Unlike privately listed InvITs, publicly listed InvITs are governed by stricter reporting and valuation requirements. Since privately listed InvITs operate under a comparatively lenient framework with less regulatory compliance, in the absence of such safeguards, there is a high probability that extending the similar investment exposure to them may jeopardise investor protection standards.
From a comparative perspective, India’s approach largely differs from jurisdictions such as Singapore and UK, which rely more on strong disclosures and sophisticated investors rather than rigid caps. In Singapore, Business Trusts, regulated by the Monetary Authority of Singapore (MAS), do not have such strict numerical investment caps. Instead, more emphasis is placed on internal governance mechanisms and disclosure standards. Similarly, in the United Kingdom investment limits are determined through disclosure obligations and shareholder approvals rather than rigid percentage caps. The governance model of both these jurisdictions are primarily based on investor prudence, decentralized decision making processes and robust governance as opposed to imposition of strict quantitative limits by the regulator. SEBI approach however, continues to rely on rigid caps without actually addressing the underlying lacunas in the system. The introduction of a 10% cap, while it appears progressive it does not fully resolve the fundamental problem of inadequate disclosure requirements for privately listed InvITs and thereby creates an imbalance, where investors are provided flexibility without providing adequate safeguards.
V. The Scope Of Borrowings Beyond The 49% Threshold
Regulation 20 (3) (b) (ii) of SEBI (Infrastructure Investment Trusts) Regulations, 2014, prohibits investment vehicles from raising any additional debt except for the purpose of acquisition or development of infrastructure projects beyond 49% of the InvIT’s NAV. In order to provide wider operational flexibility to InvITs, these regulations were further amended in 2019 to increase the maximum permitted leverage for InvITs from 49% to 70%, subject to compliance with certain conditions. However, the regulations remained unclear regarding whether capital expenditure for the purpose of performance enhancement, major maintenance expenses or refinancing is permitted. The current proposal attempts to include capital expenditure for the enhancement of asset performance and Major Maintenance (MM) expenses specifically for road projects under the permissible use. It allows refinancing of existing debt at the InvIT, SPV, or holding company level, provided that net borrowings do not increase and only the principal amount is refinanced. While these changes attempt to offer a certain measure of flexibility, in reality, their impact remains fairly limited. The continuous adherence by SEBI to a purpose-based borrowing approach is unfavourable for cash-flow based scenarios. For instance, InvITs can find short-term liquidity issues challenging if they do not meet the purpose restriction. The refinancing amendments are equally restrictive, as they allow only repayment of the existing principal without increasing borrowing limits. This can create operational difficulties, especially when additional funds are most needed during refinancing. Further, “major maintenance” has been narrowly defined. The definition is restricted to road projects and is strictly linked with concession agreement, requirements, which exclude other genuine expenses such as performance upgrades or routine maintenance needs in other sectors such as ports or railways.
In contrast, global regimes do not impose such purpose restriction as in India. In Singapore, a single aggregate leverage limit of 50% with a minimum Interest Coverage Ratio (ICR) of 1.5× applies without any restriction on refinancing, even when the ICR falls below the threshold. Similarly, in the UK, refinancing is treated as a financially prudent and pro-investor activity, with the PFI tradition of refinancing construction-risk debt with lower-cost operational financing being endorsed. Therefore, while the proposal introduces much needed flexibility, it only offers incremental relief. It fails to move away from the persistent purpose-based borrowing restrictions and continues to limit the overall operational efficiency.
Recommendations
- SEBI’s proposal to allow continued investment in SPVs post the end of concession period is well-founded, but a rigid one-year cap, especially in the road sector risks coercive disposals. Hence, defect liability periods under NHAI concessions should be extended up to five years. Further, greater discretion should be granted to the Investment manager for proper investment exit and lifecycle management.
- The expansion to Class B-I (CRV ≥ 10) schemes is progressive and should be adopted. However, in due course, India’s regulatory mechanisms must adopt an unconventional liquidity management framework such as a board-certified treasury policy with a minimum credit floor which aligns with global regimes such as Singapore, the UK, and the US. Appropriate guidelines for dealing with low-rated instruments in stressful market conditions shall be provided. A minimum AUM threshold must be disclosed so that the quality of funds and the scale can be assessed before investment.
- Mandatory disclosure obligations that bring the privately listed InvITs at par with the requirements of publicly listed InvITs can better serve the purpose of investor protection, accompanied by a careful reduction in the strict 10% cap, considering the increasing institutional appetite for early-stage infrastructure investment.
- SEBI must consider replacing the existing 70% limit with a minimum mandatory interest coverage ratio similar to Singapore’s MAS threshold of 1.5×. Additionally the AAA rating condition for borrowings above 49% should be also be reconsidered, as it conflates credit rating with creditworthiness in a manner that mature markets have moved away from. Additionally, the definition of “major maintenance” must be extended beyond road projects to cover genuine lifecycle expenditure across sectors such as ports, railways, and energy infrastructure.
Conclusion
The proposed amendments by SEBI are undoubtedly a significant step towards making the REIT and InvIT framework more responsive to commercial realities. While these amendments are a welcome step towards easing operational constraints, they are largely incremental and offer only partial relief, failing to address deeper structural problems. The continued reliance on rigid timelines, numerical caps, and purpose-based restrictions limits the effectiveness of the proposed changes and leaves several commercial realities unaddressed. In contrast, mature jurisdictions such as the UK, Singapore, and the US have increasingly moved towards frameworks that place greater trust in disclosure, governance, and managerial discretion while still safeguarding investor interests. As India’s infrastructure investment market continues to grow, the regulatory framework must evolve alongside it. Rather than introducing incremental relaxations, future reforms should focus on creating a more flexible and commercially responsive regime that balances investor protection with operational efficiency. SEBI should move away from a strict, rigid, rule-based approach towards a principles-based approach that mirrors the regulatory philosophy already embraced by more developed REIT and InvIT markets. Until it does, HYSAC will keep flagging the frictions of the year gone by, and SEBI will keep patching them one at a time.
[1] which means the project shall be at least 50% complete or shall have spent 50% of its capital cost
Morvi Sharma is a third-year B.A. LL.B. (Hons.) student at Himachal Pradesh National Law University, Shimla and Nayonika Sharma is a penultimate-year B.A. LL.B. (Hons.) student at the Institute of Law, Nirma University, Ahmedabad
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