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:

  1. Lack of clarity on borrowing by trusts under the Indian Trusts Act, 1882 (“Trust Act”) - No specific permission having been granted to trusts for the borrowing of funds under the Trusts Act, and borrowing under the said legislation primarily being undertaken through the general powers conferred upon trustees; and
  2. Bank’s dilemma relating to the enforcement of security interest - Enforceability of security interest by the banks in respect of money lent to InVITs and REITs having been left to the lending institutions by the concerned regulatory bodies.

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”).

  1. Definition of “pooled investment vehicle” –

    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.:

  2. Clarification on the meaning of the term “securities” –

    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.

  3. Prescription of special provisions in relation to pooled investment vehicles –

    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:

    1. Pooled investment vehicles shall be eligible and permitted to borrow as well as issue debt securities up to the extent and in accordance with the procedure specified under the SEBI regulations.
    2. The new norms also propose allowing the provision of security interest, in accordance with the relevant trust deed, to lenders by the pooled investment vehicle in accordance with the terms of any facility documents/agreements which may have been entered into by such a pooled investment vehicle.
    3. Further, the proposed amendment also empowers the lenders to recover any defaulted amounts, in the event of the occurrence of a default, against the trust assets through the initiation of proceedings against the concerned trustee who is acting on behalf of the pooled investment vehicle.

    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.

  4. Widening the Scope of the term ‘Borrower’ and ‘Secured Creditor’ to include the Pooled Investment Vehicles –

    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.

  5. Inclusion of debt incurred by pooled investment vehicles within the meaning of ‘Debt’ under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 -

    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.

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Pooled Investment Vehicle: The term "pooled investment vehicle" refers to a fund established in India, structured either as a trust, mutual fund, collective investment scheme, business trust, alternative investment fund, or any other fund registered with the Securities Exchange Board of India (SEBI). These vehicles collect funds from investors and invest them in compliance with SEBI regulations.

Securities and Pooled Investment Vehicles: The proposed amendments seek to clarify that debt securities, marketable securities, and units issued by pooled investment vehicles fall under the definition of "securities" as per the Securities Contracts (Regulation) Act, 1956 (SCRA). This inclusion brings consistency and regulatory clarity to the treatment of securities issued by such investment vehicles.

Special Provisions for Pooled Investment Vehicles: The amendments include the insertion of a new section, 30B, into the SCRA. This section outlines that pooled investment vehicles, whether structured as trusts or otherwise, are permitted to borrow funds and issue debt securities within the limits and procedures specified by SEBI regulations. Moreover, these vehicles can provide security interest to lenders as per the terms of facility documents/agreements, and lenders can initiate recovery proceedings against the trustee in case of defaults.

Expansion of Definitions in Other Acts: The proposed amendments also aim to redefine certain terms in related legislation. For instance, the definition of "borrower" and "secured creditor" under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is broadened to include pooled investment vehicles and debenture trustees appointed by them.

Inclusion of Debt in Recovery Proceedings: The definition of "debt" under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is expanded to encompass debts incurred by pooled investment vehicles. This amendment extends the scope of recovery proceedings to cover debts owed by such vehicles.

In summary, the proposed amendments to various financial legislations aim to address procedural hurdles faced by Infrastructure Investment Trusts (InVITs), Real Estate Investment Trusts (REITs), and other pooled investment vehicles. By providing clarity on borrowing capacity, security interest, and definitions within the regulatory framework, these amendments seek to foster a conducive environment for investment and lending to such vehicles, ultimately promoting financial stability and growth in the sector.

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