Are InvITs Truly Bankruptcy-Remote? The Insolvency Gap in India’s Infrastructure Trust Framework
InvITs have a strong governance framework, but uncertainty remains over how they should be handled when financial distress reaches the trust level.
Are InvITs Truly Bankruptcy-Remote? The Insolvency Gap in India’s Infrastructure Trust Framework
Infrastructure Investment Trusts (InvITs) have emerged as an important mechanism for financing and monetising India's infrastructure assets. By allowing investors to participate in operational projects while providing infrastructure developers with an avenue to recycle capital, InvITs have become an increasingly important part of India's infrastructure-financing ecosystem.
But as InvITs grow larger and attract a wider investor base, an important legal question is becoming harder to ignore:
What happens when an InvIT itself faces financial distress?
The regulatory framework administered by SEBI provides detailed requirements concerning governance, disclosures, asset valuation and investor protection. However, a significant uncertainty remains because InvITs are structured as trusts, while the Insolvency and Bankruptcy Code, 2016 (IBC) primarily applies to specified corporate persons.
This creates a potential gap between the regulatory framework governing InvITs during normal operations and the legal framework available when serious financial distress occurs.
What Is an InvIT?
An InvIT is a regulated investment structure designed to facilitate investment in infrastructure assets.
The structure typically brings together:
- A sponsor
- An investment manager
- A trustee
- Project-level Special Purpose Vehicles (SPVs)
- Investors or unitholders
InvITs are particularly useful for operational infrastructure assets that generate relatively predictable cash flows.
Instead of infrastructure developers holding mature assets indefinitely, the assets can be transferred into an InvIT structure, allowing capital to be raised from investors and potentially redeployed into new infrastructure projects.
The framework was introduced through the SEBI (Infrastructure Investment Trusts) Regulations, 2014.
Why Bankruptcy Protection Matters
InvITs are designed around long-term infrastructure assets.
These projects can involve:
- Long concession periods
- Significant debt financing
- Government contracts
- Regulatory obligations
- Large institutional investments
- Long-term cash-flow projections
This means that financial distress cannot simply be treated as an ordinary corporate default.
Investors and lenders need to know in advance:
Who gets paid first?
Who controls the assets?
What happens to the trust?
What rights do unitholders have?
Can the underlying assets be restructured?
Without clear answers, uncertainty can increase the perceived risk of investing in infrastructure through an InvIT.
The IBC Problem
The central legal difficulty arises from the nature of an InvIT.
An InvIT is structured as a trust, rather than as a conventional company.
The IBC provides a detailed insolvency-resolution framework for entities falling within its scope. However, the InvIT itself does not clearly fit into the same framework merely because it owns or controls infrastructure assets.
This creates an important distinction:
Project-Level Distress
The underlying SPVs may qualify as corporate debtors and can potentially be dealt with under the IBC.
InvIT-Level Distress
The position becomes much less certain when financial distress affects the InvIT structure itself.
The source identifies this as a significant regulatory blind spot because the interests of creditors, unitholders, sponsors, trustees and investment managers do not fit neatly into the existing insolvency framework.
Strong Governance Does Not Mean a Resolution Framework
SEBI has progressively strengthened the governance framework applicable to InvITs.
The regulatory regime deals with matters such as:
- Asset valuation
- Disclosure requirements
- Investment restrictions
- Cash-flow distributions
- Trustee responsibilities
- Compliance monitoring
Recent amendments have also strengthened trustee-related duties and provided additional flexibility in areas such as sponsor-unit transfers and permissible investments.
However, these measures primarily address how an InvIT should operate and be governed.
They do not necessarily answer the separate question of how an InvIT should be resolved when it becomes financially distressed.
Distribution Requirements
InvITs are designed as income-focused investment vehicles.
Under the existing framework, public InvITs are required to distribute cash flows to investors on a semi-annual basis, while private InvITs have a minimum annual distribution requirement.
The source notes that at least 90% of net distributable cash flows are required to be passed on to unitholders under the applicable framework.
While these requirements support investor returns, they also highlight why the treatment of cash flows during financial distress needs to be clearly understood.
NHAI's Raajmarg InvIT: A Relevant Example
The increasing importance of InvITs can be seen through the Raajmarg Infra Investment Trust (RIIT) established by the National Highways Authority of India (NHAI).
RIIT's public issue was listed on the BSE in March 2026, expanding access to infrastructure investment beyond traditional institutional investors.
The government also intends to use the InvIT model to monetise approximately 1,500 kilometres of highway assets over three years.
This demonstrates how InvITs are becoming part of India's wider infrastructure asset-recycling strategy.
Why RIIT Is Important to the Debate
The Raajmarg InvIT example shows that InvITs are no longer necessarily limited to highly specialised institutional investment structures.
As infrastructure trusts attract a wider investor base, including retail participation, questions about financial distress become more important.
A larger and more widely held InvIT potentially means a larger number of stakeholders whose interests must be protected if financial difficulties arise.
The regulatory framework therefore needs to address not only capital mobilisation, but also what happens when the structure encounters financial stress.
The Creditor Rights Question
One of the most significant unresolved issues concerns creditor priority.
If an InvIT experiences financial distress, different stakeholders may have competing interests:
- Secured lenders
- Other creditors
- Unitholders
- Sponsors
- Trustees
- Investment managers
- Project-level entities
The existing framework does not provide a comprehensive answer to how these interests should be ranked and resolved at the trust level.
Reports of lenders seeking senior creditor status in NHAI-linked InvIT structures demonstrate that these questions are not merely theoretical.
What Happens If Only One Project Faces Distress?
Another complicated situation arises when financial stress affects only part of an InvIT's portfolio.
For example, an InvIT could own several infrastructure assets, but one project may experience:
- Temporary operational disruption
- Revenue shortfalls
- Regulatory problems
- Litigation
- Financing difficulties
The InvIT as a whole may still be financially viable.
This raises another question:
Should the entire InvIT be subjected to a resolution process when only one project or SPV is under stress?
A suitable framework would need to distinguish between temporary or project-specific difficulties and genuine trust-level insolvency.
Why the Existing SPV Model Provides More Clarity
Where financial distress occurs at the level of an underlying SPV, the legal position is comparatively clearer.
Such an entity may qualify as a corporate debtor under the IBC, allowing creditors to use the statutory insolvency framework where applicable.
The difficulty arises when the distress extends beyond the individual SPV and affects the InvIT itself.
There is currently no equally clear mechanism explaining how the trust, its assets, creditors and unitholders should be dealt with collectively.
The Cost of Regulatory Uncertainty
Uncertainty around insolvency can directly affect investment decisions.
If lenders and investors cannot predict:
- Their recovery rights
- Priority of claims
- Enforcement mechanisms
- Treatment of trust assets
- Rights of other stakeholders
they may perceive infrastructure investments as carrying additional risk.
That risk can ultimately increase the cost of infrastructure financing.
This is particularly important for India because InvITs are increasingly being used as a mechanism to mobilise long-term capital for infrastructure development.
Should InvITs Come Under the IBC?
The debate presents several possible approaches.
1. Extend the IBC Framework
One option could be to expressly bring InvITs within an appropriate insolvency framework.
This would provide a familiar statutory mechanism for resolving financial distress.
2. Resolve Distress Through Underlying SPVs
Another approach could focus on resolving financial problems at the project-company level while keeping the wider InvIT structure intact where possible.
3. Create a Separate Business-Trust Resolution Framework
A third possibility would be a specialised regime designed specifically for business trusts and investment structures.
Such a framework could account for the unique relationship between:
- Infrastructure assets
- Trustees
- Investors
- Lenders
- Sponsors
- Project SPVs
The source does not prescribe one definitive solution but highlights the need for greater clarity on this issue.
Why Investor Protection Is Becoming More Important
As InvITs attract more retail and domestic investors, investor protection becomes increasingly significant.
Retail investors may not have the same ability as institutional investors to evaluate complex structural and insolvency risks.
A predictable distress-resolution framework could therefore strengthen:
- Investor confidence
- Market participation
- Infrastructure financing
- Credit availability
- Overall market stability
What Should Regulators Consider?
A future regulatory framework could potentially clarify:
- Whether InvITs themselves can enter insolvency proceedings
- Rights and priority of creditors
- Rights of unitholders during distress
- Trustee responsibilities
- Powers of investment managers
- Treatment of project-level SPVs
- Restructuring options
- Enforcement of security interests
- Treatment of temporary financial stress
- Procedures for dealing with portfolio-specific distress
The objective should be to ensure that InvIT regulation is capable of handling both normal operations and financial failure.
Key Takeaways
- InvITs have become an important tool for infrastructure financing and asset monetisation.
- Their trust-based structure creates uncertainty regarding their treatment under the IBC.
- Underlying SPVs may fall within the IBC, but the position at the InvIT level remains less clear.
- SEBI's governance reforms strengthen oversight but do not create a complete insolvency-resolution framework.
- Creditor priority and stakeholder rights remain important unresolved questions.
- The growth of retail participation makes clarity on distress resolution increasingly important.
- India may need to consider an IBC-based solution, SPV-level resolution, or a specialised framework for business trusts.
Conclusion
InvITs have developed into an important part of India's infrastructure-financing ecosystem, helping unlock capital from operational assets and channel it towards future infrastructure development.
However, their growing importance makes the absence of a clearly defined financial-distress and resolution framework increasingly significant.
The regulatory framework is relatively well developed for governance, disclosure, asset management and investor protection during normal operations. The larger gap lies in answering what happens when an InvIT faces serious financial stress.
As infrastructure monetisation expands and InvITs attract more investors, India may need to move beyond a framework focused primarily on governance and stability and establish a predictable mechanism for distress resolution, creditor rights and stakeholder protection.
A clear framework could ultimately strengthen investor confidence and make InvITs an even more reliable channel for long-term infrastructure financing.
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