Investment Trusts: Clarity and Conciseness

Understanding Investment Trusts

An Investment Trust is defined as a Real Estate Investment Trust (REIT) or an Infrastructure Investment Trust (InvIT) registered under IFSCA (Fund Management) Regulations, 2022. It serves as an avenue for investors to pool their funds in various real estate or infrastructure projects, ensuring a diversified portfolio and better returns.

Setting Up an Investment Trust in IFSC

Individuals or corporations from IFSC, India, or foreign jurisdictions can establish an Investment Trust in IFSC, provided they register the trust with the regulatory authority.

Raising Funds for Investment Trusts

Investment Trusts can raise funds via the following methods:

1. Public issue with units listed on a recognized stock exchange
2. Private placement with units listed on a recognized stock exchange
3. Private placement with units not proposed to be listed on any recognized stock exchange

The Role of Holding Companies in Investment Trusts

A Holding Company, also known as a Hold Co, is a structure approved by the IFSC authority. It possesses the following characteristics:

• Holds controlling interest and at least 51% of the equity share capital or interest in Investment Trusts, which in turn have made investments in other SPVs holding infrastructure assets or properties
• Engages solely in activities relating to holding underlying SPVs, real estate, properties, or infrastructure projects

Sponsors of Investment Trusts

A Sponsor is any company, LLP, or body corporate that establishes the Investment Trust in IFSC and is designated as such during the application process. They play a crucial role in setting up and providing financial backing for the trust.

Eligibility Criteria for Investment Trust Sponsors

Sponsors must meet the following eligibility requirements:

• Hold or propose to hold at least 5% of the number of units of the Investment Trust on a post-initial offer basis
• Possess a minimum net worth (depending on the type of Investment Trust)
• Have a track record of experience in real estate, infrastructure development, or fund management in related sectors

Investment Managers for Public Issues of Investment Trusts

Only Registered FME (Retail) can be appointed as Investment Managers in cases involving public issues for Investment Trusts.

Minimum Offer and Allotment to the Public for Listed Investment Trusts

The minimum offer and allotment requirements for Investment Trusts listed on a stock exchange vary based on the post-issue capital. It ranges from at least 25% for Trusts with less than USD 240 million capital to 10% for those with USD 600 million or more.

Foreign Investments and Lending Activities

Investment Trusts can invest in foreign jurisdictions, subject to compliance with local laws and regulations. While lending is not permitted, investments in debt securities are allowed.

Listing Requirements and Sponsor Holding Periods

Units of Investment Trusts must be listed on a stock exchange within a specified period after the closure of the initial public offer or private placement allotment. Sponsors are required to hold at least 20% of the total units of the Investment Trust for a minimum of three years following listing.

Selling Units and Delisting

Unit holders, other than sponsors, must hold units for at least six months post-listing before selling. A stock exchange can delist Investment Trusts under specific circumstances, such as suspension of trading, regulatory orders, or at the request of the FME.

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Investment Trusts: Diversification and Risk Management

In addition to the previously covered topics, there are several other aspects of Investment Trusts that potential investors should consider. These include advantages like diversification and risk management, the importance of due diligence, and taxation implications.

Advantages of Investing in Investment Trusts

Investment Trusts present numerous benefits to investors, such as:

1. Diversification – By pooling funds from various investors, Investment Trusts can invest in multiple sectors, properties, or infrastructure projects, reducing overall risk by spreading it across a wide range of investments.
2. Professional Management – Investment Trusts are managed by experienced professionals who possess in-depth knowledge of the financial market, ensuring better decision-making and higher returns.
3. Liquidity – Units of listed Investment Trusts can be easily bought and sold on the stock exchange, providing investors with easy access to their funds whenever required.
4. Transparency – As publicly traded securities, Investment Trusts adhere to strict regulatory requirements, promoting transparency and accountability in their operations.
5. Income Generation – Investment Trusts distribute income generated through rental revenue or interest payments to unit holders, making them an attractive option for those seeking regular income.

Conducting Due Diligence before Investing

Before investing in Investment Trusts, investors must conduct thorough due diligence to evaluate the financial stability and growth prospects of the trust. Factors influencing the performance of an Investment Trust include:

• The expertise and experience of the management team
• The quality of the assets and projects being invested in
• The overall market conditions and macroeconomic factors
• The trust’s fees and expense ratios

Taxation Implications of Investment Trusts

Investment Trusts may have different tax implications based on the jurisdiction, type of trust, and income generated. Investors should seek expert advice to understand the tax consequences of investing in a particular Investment Trust to make informed decisions and optimize their returns.

In conclusion, Investment Trusts offer various advantages to investors, making them an attractive option for diversifying one’s portfolio and seeking stable, long-term returns. However, investors need to conduct in-depth due diligence and consider taxation implications before making any investment decisions. By remaining informed and vigilant, investors can maximize their opportunities within the world of Investment Trusts.

Operating Procedures for Investment Trusts

Beyond investment considerations, it’s also crucial to understand the operational elements of Investment Trusts. Here, we’ll focus on the function of an Authorised FME, stock exchange delisting regulations, and the voluntary delisting of units.

Role of an Authorised FME

A vital element within the trust’s operations is the function of an Authorised Foreign Market Entity (or Authorised FME). In the case of public issues, this role does not pertain to the management of the Investment Trust. Instead, only a Registered FME (Retail) has the capacity to manage the trust’s operations in this case. This distinction helps maintain stringent regulatory compliance and operational integrity.

Delisting of Investment Trusts from the Stock Exchange

There are instances where the stock exchange may delist Investment Trusts, effectively removing the trust’s units from the public trading platform. Here are some circumstances that can lead to such an action:

1. The trust has been suspended from trading for more than six months and the parties involved have not taken adequate measures for the restoration of listing and trading.
2. Ineligibility for listing or trading.
3. The trust has been subject to compulsory delisting from another exchange.
4. The exchange identifies special circumstances that require delisting of the trust.
5. A directive to delist is issued by the Authority or another relevant authority or a court order.

Understanding these stipulations help investors to be aware of any such changes that could impact their holdings’ tradeability and liquidity.

Voluntary Delisting of Units

Beyond imposed delisting, even the Foreign Market Entity themselves or the Investment Trust may request the IFSC stock exchange to delist its units. This exercise takes place as per the process defined by the stock exchange or the Authority, ensuring regulatory compliance.

Investment Trusts present a comprehensive arena of financial engagements, with aspects ranging from setting up the trust, it’s operational geography, regulatory prerequisites, and even potential causes for its closure. In-depth understanding of these aspects can empower investors and interested parties to make informed decisions, maximizing their investment benefits while minimizing risks.