Trust in the trust: Governance and Investor Protection

Trust is built with consistency - Lincoln Chafee

What is an InvIT and why does it matter? Infrastructure Investment Trusts (InvITs) are pooled investment vehicles that allow investors to participate in income-generating infrastructure assets such as roads, power transmission lines, or renewable projects. Instead of directly owning or operating these complex assets, investors buy units of an InvIT - like mutual fund units - and receive a steady stream of income.

For investors, InvITs combine the best of both worlds:

1. Stability of returns by long-term concession agreements, often with inflation-linked revenues.

2. Liquidity through exchange-listed units, unlike direct infrastructure investments which are illiquid.

3. Diversification across multiple assets, geographies, and revenue models, thereby reducing risk.

4. Growth potential since InvITs can acquire new assets, supported by transparent governance and regulatory oversight.

InvITs provide a “steady hand” for portfolios - bridging the gap between the volatility of equities and the low yields of fixed deposits. For long-term investors seeking predictable income and capital appreciation, InvITs represent an increasingly mainstream choice in India’s financial markets.

As the Indian economy continues to grow rapidly, the demand for new and upgraded infrastructure, including highways, ports, airports, energy grids, warehouses, and digital systems, is also rising. However, financing these capital-intensive projects poses a challenge due to the significant upfront costs, long gestation periods, and uncertain returns associated with them.

Traditionally, these factors have limited their development to the public sector. This scenario is now changing, as private capital is beginning to play a role through InvITs. By pooling various infrastructure assets, InvITs are attracting some of the world’s largest institutional investors, including pension funds, sovereign wealth funds, private equity firms, etc.

Why governance is central

In the world of InvITs, the word “trust” is not just a legal formality - it is the foundation of the entire structure. Investors may not drive on every kilometre of road the InvIT owns, inspect every pylon in its transmission lines, or review every toll receipt, but they must have confidence that someone is doing so on their behalf — and doing it well.

That “someone” is the governance framework: the Board of Directors (with over 50% Independent Directors directors), Trustees, Investment Managers, Project Managers, Independent Valuers, Statutory and Internal Auditors, and Regulators who make sure that an InvIT operates fairly, transparently, and in line with investor interests.

Why Governance Matters in InvITs

An InvIT is a pooled investment vehicle that holds large, often monopolistic infrastructure assets. Their cash flows are tied to long-term contracts and concession agreements.

This makes governance crucial for:

• Ensuring transparency in how distributions are calculated and paid.

• Guarding against conflicts of interest between the sponsor and investors.

• Maintaining market confidence through accurate disclosures.

Without strong governance, even the best infrastructure assets can lose investor trust - and market value.

The Governance Structure – Who’s Who

1. Board of Directors and Committees – The Board, with a majority of independent directors, provides strategic oversight and ensures that management decisions align with unitholder interests. It functions through specialised committees - such as the Audit Committee, Nomination and Remuneration Committee, Risk Management Committee and Stakeholders Relationship Committee - which focus on specific governance areas. These committees enhance transparency, strengthen accountability, and ensure that critical matters receive detailed, expert review before decisions are made.

2. Trustee - Custodian of InvIT Assets for the benefit of the investor, appointed under SEBI regulations. With the evolving roles and responsibilities of Trustee,  for ensuring compliance with the trust deed and InvIT regulations, monitoring the Investment Manager’s activities, approving related-party transactions, and holding assets in trust for unitholders. Must remain independent from both the sponsor and the Investment Manager. 

3. Investment Manager (IM) - The IM is responsible for the management of the InvIT, including decisions on acquisitions, financing, and operational matters. It also prepares financial statements and investor communications and ensures that distributions are made on time. The IM operates under the oversight of the trustee and is accountable to both the trustee and SEBI.

4. Project Manager (PM) - The PM is typically appointed to operate and maintain the underlying infrastructure assets, ensuring they meet performance benchmarks and contractual obligations. Its role, however, goes well beyond day-to-day operations. A capable Project Manager is responsible for ongoing operational decision-making, which directly impacts asset performance, longevity, and revenue stability. In some of the most successful InvITs, Project Managers are not merely operators but strategic partners who bring higher-order capabilities such as:

• Research & Development (R&D): Continuously exploring improvements in materials, construction methods, and lifecycle management of infrastructure assets.

• Innovation: Driving new approaches in asset utilization, predictive maintenance, and operational efficiency.

• Digitization & Technology Adoption: Implementing digital monitoring, IoT sensors, AI-driven traffic forecasting, or smart-grid optimization to reduce downtime, control costs, and enhance safety.

By embedding such advanced practices, Project Managers contribute to efficiency gains, improved asset reliability, sustainability outcomes, and ultimately, enhanced long-term value for unitholders.

5. Sponsor - The Sponsor plays a crucial role in the creation of an InvIT by contributing assets, meeting initial eligibility criteria, and providing the starting structure for the trust. SEBI regulations require sponsors to have adequate financial strength and a demonstrable track record in infrastructure development or fund management — ensuring that only credible sponsors can seed an InvIT.

However, once the InvIT is listed and operational, the Sponsor’s role becomes limited. Governance and decision-making shift to the Trustee, Investment Manager, and independent Board committees, which act in the best interest of unitholders and under SEBI’s regulatory oversight. The Sponsor may continue to support the platform by offering a pipeline of assets or strategic guidance, but it does not control the day-to-day functioning of the trust.

6. Independent Valuer - InvIT assets must be valued at least twice a year by a publicly offered InvIT and annually by privately placed InvIT (and quarterly in case Net Debt / EV exceeds 49%) by an independent valuer, with the report made public. These independent valuations serve as a transparent reference point for investors — helping them benchmark portfolio performance and understand underlying asset worth.

However, the valuation is not intended as a ceiling or floor on market price. Listed InvIT units may trade at a premium or discount to NAV depending on factors such as investor demand, prevailing interest rates, distribution expectations, liquidity, and confidence in the InvIT’s growth pipeline. In that sense, published valuations act as informed guidance, while actual market prices reflect investor sentiment and forward-looking expectations.

7. Auditors - Statutory Auditors ensures the financial statements fairly represent the InvIT’s performance and comply with accounting standards. Internal Auditors, reporting to the Board, test internal controls and compliance.

8. SEBI and other regulators - The regulator sets the rules, enforces compliance, and can act against breaches.

The Role of the Audit Committee

Comprising primarily independent directors, the audit committee plays a critical oversight role in safeguarding investor interests. It reviews and approves the InvIT’s financial statements along with draft statutory auditors report, examines internal audit reports, monitors related party governance, recommendation for appointment, remuneration and terms of appointment of auditors, and compliance with applicable laws and regulations, and assesses the adequacy of risk management frameworks, vigil mechanism etc. 

By providing independent scrutiny over financial reporting and control processes, the audit committee serves as the first line of defence against accounting irregularities, governance lapses, or compliance breaches, thereby reinforcing transparency and investor confidence.

Key Governance Safeguards for Investors

Investment in Stable, Operational Assets

SEBI regulations mandate that at least 80% of an InvIT’s assets must remain invested in completed and revenue-generating infrastructure projects. This safeguard ensures investor exposure is predominantly to cash-flowing, low-construction-risk assets, rather than speculative or under-development projects.

The balance (up to 20%) may be deployed in under-construction assets, debt securities, or other permissible investments — providing controlled flexibility without compromising stability. By anchoring portfolios in mature, income-yielding infrastructure, this framework creates predictability in returns and shields investors from excessive development-stage risk

90% Distribution Rule 

Ensures most cash flow reaches investors rather than being retained at the InvIT level. What strengthens this safeguard further is the mandatory publication of Net Distributable Cash Flow (NDCF) calculations on a quarterly basis. By tracking actual cash flows available for distribution, InvITs provide investors with a transparent, cash-based measure of performance. This substantially reduces accounting risks since investors are not relying solely on accrual-based earnings.

NAV and Valuation Transparency

In addition to distributions, InvITs must publish periodic Net Asset Value (NAV)  prepared based on report by independent valuers. This is a distinguishing feature of the InvIT framework — offering investors a clear, externally validated view of underlying asset value. While market prices may trade at a premium or discount to NAV, publication of NAV serves as a useful benchmark that enhances market discipline and investor confidence.

Leverage Limits

SEBI caps leverage at 70% of asset value (subject to certain conditions). It protects the InvIT from over-borrowing, with a 70% cap unless unitholders approve higher leverage and meets credit rating norms.

Related-Party Transaction Oversight

Transactions with the sponsor or its affiliates are subject to strict scrutiny to safeguard unitholder interests. The framework includes:

• Prior approval by the Audit Committee (which must have a majority of independent members).

• Mandatory disclosure to investors.

• Unitholder approval where the value of the related-party transaction exceeds 10% of InvIT’s value or crosses other prescribed thresholds under SEBI regulations.

This tiered approval system ensures that smaller, routine dealings are monitored closely by independent directors, while larger or strategically significant transactions cannot proceed without the explicit consent of unitholders

Regular Reporting & Transparency

InvITs follow a robust disclosure framework to keep investors fully informed. They publish quarterly results, NDCF calculations, debt position, and distribution breakdown, along with periodic updates such as NAV reports (based on the Enterprise value by independent valuers), portfolio performance, credit ratings, governance disclosures, and other regulatory filings.

Annual and half-yearly reports are also made available on the InvIT’s website. This high-frequency, multi-layered reporting provides transparency on both cash flows and asset values, enabling investors to benchmark performance and compare market prices to fair value.

Unitholder Voting Rights

Unitholders retain the right to vote on significant matters such as large acquisitions or disposals, amendments to the trust deed, leverage beyond limits, or removal of the investment manager — giving investors a direct say in critical governance decisions. SEBI also provides exit rights to dissenting unitholders in specific situations (such as a change of sponsor) and ensures investor recourse through formal grievance redress platforms such as SCORES and ODR mechanisms.

Your Governance Checklist Before Investing

Why Governance is Your Best Insurance

Good governance won’t eliminate market or operational risk, but it minimises avoidable risks - those that come from poor decisions, lack of oversight, or hidden conflicts.

For long-term income vehicles like InvITs, this is critical: the assets last decades, and so must investor confidence.

To Part With

An InvIT is not just a set of roads, cables, or power lines - it is a legal and operational ecosystem. Governance is the invisible scaffolding that keeps it standing, rain or shine.

Assets may generate returns, but governance safeguards them. In InvITs, strong governance isn’t just a compliance requirement - it’s the investor’s best insurance policy.