One of the amendments proposed to be brought through the Finance Bill, 2021 (“Bill”) is the introduction of the concept of “pooled investment vehicle”. The legislative intent behind the introduction of such a concept is to cure the procedural hurdles that were being faced (i) by Infrastructure Investment Trusts (“InVITs”) and Real Estate Investment Trusts (“REITs”) in the course of borrowing funds; and (ii) by the banks in the course of enforcement of security interest created by such InVITs and REITs.
Despite the Securities Exchange Board of India (“SEBI”) having permitted InVITs and REITs to borrow funds from various sources, banks were reluctant in lending to such entities due to the following gaps in the legislative framework:
The proposed amendment seeks to provide clarity on the borrowing capacity of such trusts through the introduction of an umbrella definition called “pooled investment vehicles” which not just includes InVITs and REITs, but other such entities as well. Care has also been taken to ensure that other relevant legislations, are also amended to ensure consistency in the overall legislative framework.
Clauses 138 to 140 of the Bill seeks to amend the provisions of the Securities Contracts (Regulation) Act, 1956 (“SCRA”).
The Bill proposes to define the expression “pooled investment vehicle” by inserting clause (da) under Section 2 of SCRA and providing for a comprehensive definition for the expression “pooled investment vehicle”. According to the definition, a “pooled investment vehicle” may be understood as a fund which is established in India in the form of a trust or as a mutual fund, collective investment scheme, business trust or an alternative investment fund or such other fund registered with SEBI, which is involved in the raising or collection of money/funds received from the investors. The pooled investment vehicle would thereafter, invest such funds received in a manner which is in compliance with the regulations in this regard, as may be laid down by SEBI.:
The Bill further proposes to clarify that debt securities and such other marketable securities as well as the units issued by pooled investment vehicles are “securities”.
The definition of “securities” under Section 2(h) of the SCRA has been proposed to be expanded so as to include the units issued by pooled investment vehicles within its scope. The Bill has also provided a clarification to the effect that the term “securities” in relation to a pooled investment vehicle shall be inclusive of debt securities and the other marketable securities and units issued by a pooled investment vehicle.
The Bill also proposes to insert a new section 30B in the SCRA to specify that a pooled investment vehicle, whether constituted as a trust or otherwise, shall be eligible to borrow and issue debt securities and shall be permitted to provide security interest to lenders, in terms of the facility documents, entered into by such pooled investment vehicles.
According to Section 30B of the SCRA:
However, such trustee shall not be bound by any personal liability in this behalf and thereby, the utilisation of the personal assets of such trustee shall not be permitted for the purpose of recovering the debt. Moreover, any amount remaining subsequent to the payment being made to the lenders shall be remitted to the unit holders.
Pursuant to the introduction of the concept of pooled investment vehicle under the SCRA in the abovementioned manner, the Bill under clause 151, has also proposed to re-define the scope of the definition of “borrower” and “secured creditor” under Section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). Post the proposed amendment, the definition of “borrower” under Section 2(f) of the SARFAESI Act shall now be inclusive of a pooled investment vehicle as well. Further, the definition of “secured creditor” under Section 2(zd) of the SARFAESI Act is proposed to be expanded to also include a debenture trustee appointed by pooled investment vehicles.
The definition of “debt” under Section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 has also been proposed to be amended to expand the meaning of the term to include the debts incurred by pooled investment vehicles, pursuant to clause 149 of the Bill.
The amendments proposed under the Bill significantly address the challenges confronting the financing of InVITs and REITs and are likely to encourage lending to such pooled investment vehicles.
The amendments discussed hereinbelow have been specified to be effective from April 01, 2021.