Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014, does not mandate Hold Cos and SPVs for having its securities held by InvITs in dematerialized form only.
SEBI, in exercise of powers conferred to it under Section 11(1) of the Securities and Exchange Board of India Act, 1992 and Regulation 33 of the InvIT Regulations, vide its circular no. SEBI/HO/DDHS-PoD-2/P/CIR/2023/76 dated May 22, 2023, has now stated that shares held by Infrastructure Investment Trusts (InvITs) in Hold Cos and SPVs shall be held in demat form. These circular further states that existing shareholdings by InvITs in Hold Cos and SPVs in physical form, the Investment manager of the InvIT has to ensure to dematerialize the securities of Hold Cos and SPVs of the InvIT on or before June 30, 2023.
The Investment Manager (IM) of the InvIT is directed to dematerialize the securities of Hold Cos and SPVs held by the InvIT. Therefore, IM of InvIT shall ensure that the physical securities held by the InvITs in its Hold Cos and SPVs are dematerialized within the stipulated time period as mentioned in the circular.
Analysis on Circular:
After perusing various current InvIT models in India, it is observed that the Hold Cos and SPVs of the InvITs are generally incorporated as private limited companies. As per the provisions of the Companies Act, 2013, private companies are not mandated to have its securities in dematerialized form. So even if Companies Act, 2013 does not mandate but to have shares in demat form but as SEBI has now mandated InvITs to hold shares in demat form if hold cos and SPVs are private companies they will have to take International Security Identification number (ISIN).
In context of the above, now the question may arise that whether the shares of Hold Cos and SPVs which are Private Companies will become freely transferable by merely getting their securities dematerialized for the compliance of this circular?
In accordance with the provisions of Section 2(68) of the Companies Act, 2013, the Private Company by virtue of its Articles, restricts the right to transfer its shares except by way of approval of Board to that effect. Hence, mere dematerialization of shares of Private Company shall not be construed as free transferability of shares.
It also needs to be checked whether going forward whether the entire shareholding of the Hold Cos and SPVs are to be in dematerialized form or dematerialization of securities is limited to the extent of holding of InvIT in such Hold Co and SPV only?
The fine width of the referred circular states that “for existing securities holdings by InvITs in Hold Cos and SPVs in physical form, the Investment manager of the InvIT is directed to dematerialize the securities of Hold Cos and SPVs of the InvIT”. Hence, it is amply clear that the circular is only applicable to the extent of shareholding of InvIT in its Hold Cos and SPVs and not the entire shareholding of the Hold Cos and SPVs. Therefore, it would be construed as proper compliance to this circular if the shareholding of the InvIT in the Hold Cos and SPVs are in dematerialized form.
So, it can be seen that Investment Managers of the InvITs will have to ensure that the existing physical securities held by the InvITs in its Hold Cos and SPVs are dematerialized on or before June 30, 2023. Further, non- dematerialization of existing shareholding of InvITs in Hold Cos and SPVs by the above timeline might be considered as non-compliance of circular.
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