Introduction.
Infrastructure Investment Trusts (InvITs) were introduced to provide funds and liquidity for large infrastructure projects that support the country’s economic growth. This purpose is achieved through the investors—called unit holders—who put in their money through the InvIT structure. Their investment allows the InvIT to acquire and operate infrastructure assets and is essential to its functioning. In this way, unit holders play a role similar to shareholders of a company, as both provide the capital needed for the business and share in its benefits.
In this article, we will try to understand the concept of unit holders and examine the role of unit holders in an InvIT by drawing parallels with the concept of shareholders in a company.
Concept of unit holders
As mentioned above, the concept of unit holders of INVIT is similar to that of shareholders of a company. just like the shareholders, the unit holders are the entities who provide funds to the INVIT as against the fractional ownership of the infrastructure assets held by the trust. The INVIT uses the funds received from the unit holders to acquire the infrastructure assets and in return issue units to the unit holders which indicate fractional ownership of the assets owned by the INVIT/trust.
However, there is one difference between the shareholders of company and unit holders of INVIT. This difference arises due to the very nature of the 2 entities. In case of shareholders, they are the owners of the company itself. However, an INVIT being a trust cannot have owners. The unit holders are the fractional beneficiaries of the trust property, that is the infrastructure assets held by the INVIT through SPVs.
Rights of unitholders.
Since the unit holders are the beneficiaries of the trust, they have right to know about all the details relating to trust’s assets and management thereof. The investment manager (IM)of the INVIT who manages the assets for the benefit of the unit holders, is required to inform unit holders about all the activities relating to trust through various quarterly, half yearly and annual reports, just like in case of shareholders of a company. also the IM is required to call annual general meeting of unit holders of trust ones in a year in order to give them updates about activities that took place during the year and to take their approval for upcoming activities in near future.
In case of company, approval of shareholders is required for carrying out certain transactions, similarly, the IM of the INVIT is required to obtain approval of unit holders before undertaking certain transactions like acquisition of new infrastructure assets, related party transactions, change in trustee/IM/project manager and appointment of directors, auditors, valuers etc. however, the percentage of voting required for approval of resolutions is slightly different as compared to the Companies Act.
Management participation
Just like the small shareholders of a listed company have right to appoint a small shareholders director on the board of the listed company, the unit holders of INVIT holding 10% units, have right to appoint a director on the board of investment manager. If no single unit holder holds 10% units, then more then one unit holders collectively holding 10% units can come together and appoint a director on the board of IM. This right gives the unit holders direct access to the board room of the IM, as The director appointed by the unit holders takes care of the interest of unit holders during the decision making process.
Key differences between shareholders & unit holders.
Although the concepts of shareholders and unit holders are on similar grounds, there are some noteworthy differences between the two. As discussed above, the shareholders are owners of the company whereas, the unit holders are the beneficiaries of the INVIT’s assets. Further, with respect to types of units, there are no multiple kinds of unit holders like equity shareholders and preference shareholders in case of a company. also, unlike companies, INVITs cannot issue units with differential or superior rights. It can only issue subordinate units and that also only to the sponsors for the purpose of complying with minimum unit holding requirement for sponsors prescribed by INVIT regulations 2014.
Other than this, there is difference in percentage of votes required for approving specific transactions by unit holders. Under Companies Act, the certain transactions are approved by shareholders if 51% votes are in favor of transaction (ordinary resolution), and some transactions are approved if 75% votes are in favor of transaction (special resolution). In case of unit holders of INVIT, these percentages are different. regulation 22 of INVIT regulations prescribe the percentage of voting required for approval of transactions. Regulation 22(4) lists the transactions which require more than 50%votes for approval. Whereas, regulation 22(5) lists the transactions which require more than 60% votes for approval. Further, items listed in regulation 22(5A & 5C) require votes of 75% of the unit holders by value for approval.
Conclusion Unit holders are central to the InvIT structure and play an important role in its governance, transparency and overall performance. Although their position is similar to that of shareholders, the trust-based structure of InvITs gives them a distinct set of rights and responsibilities. As InvITs continue to grow as a mode of infrastructure financing, the importance of unit holders and the regulations around their rights will only increase. Understanding their role clearly helps in ensuring better governance, informed decision-making and greater confidence in this asset class