InvIT

Infrastructure Investment Trusts: An emerging financial armour

Post By : Basundhara Choudhury
Post Date : April 13, 2021
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Reading Time: 6 minutes

A well-developed infrastructural set-up propels the overall development of a country. It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner. As a very niche instrument, Infrastructure Investment Trusts (InvITs) are set to change the phase of infrastructural investments in the country. This feature explores the pros and cons of this emerging financial instrument.

An Infrastructure Investment Trust (InvIT) is similar to a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return. They are regulated by the Securities and Exchange Board of India(SEBI).

InvITs act as mutual funds or real estate investment trusts (REITs) in features. They can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.

Primary Objective

The primary objective of InvITs is to promote the infrastructure sector of India by encouraging more individuals to invest in it and can be modified according to a given situation. It is designed to pool money from several investors to be invested in income-generating assets.

The cash flow thus generated is distributed among investors as dividend income. In comparison to Real Estate Investment Trust or REITs, the structure and operation of both remain largely similar.

Structure

Structure-wise, InvITS are like mutual funds. They can be established as a trust and registered with SEBI. An InvIT consists of four elements:

  • Trustee: The trustee, who looks supervises the performance of an InvIT is certified by SEBI and thus cannot be an associate of the sponsor or manager.
  • Sponsor(s): ‘Sponsors’ are people who promote and refer to any organisation or a corporate entity with a capital of INR 100 crore, which establishes the InvIT and is designated as such at the time of the application made to Sebi, and in case of PPP projects, base developer. Promoters/sponsor(s), jointly, have to hold a minimum of 25% for three years (at least) in the InvIT, excluding the situations where an administrative requirement or concession agreement needs the sponsor to hold some minimum per cent in the special purpose vehicle. In these cases, the total value of the sponsor holding in the primary special purpose vehicle and in the InvIT should not be less than 25% of the value of units of InvIT on post-issue basis.
  • Investment Manager: An investment manager is an entity or limited liability partnership (LLP) or organisation that looks after the assets and investments of the InvIT and guarantees activities of the InvIT.
  • Project manager: Project manager refers to the person who acts as the project manager and whose duty is to attain the execution of the project and in case of PPP projects. It indicates that the entity is responsible for such execution and accomplishment of project landmark with respect to the agreement or other relevant project document.

Types of Infrastructure Investment Trusts

Through InvITs, individuals can utilize their funds into infrastructure projects in two ways, i.e. either directly or through particular purpose vehicles, thus classifying them in two different types.

  • Investment in revenue-generating finished projects: One of the types allows investment in revenue-generating finished projects and tends to invite investors through a public offering.
  • Investment in projects under construction: Additionally, investors are also allowed to invest in projects that are under construction or have been finished. Notably, this type opts for a private placement of its units.

Purpose of InvITs

The purpose of InvITs is to facilitate Infrastructure Companies to repay their debt obligation quickly and effectively. Since infrastructure-oriented projects tend to take time to generate substantial cash flow, InvITs are a convenient option for paying off loan interests and other expenses conveniently.

Benefits of InvITs

Although regarded as one of the most expensive investment avenues previously, InvITs tend to offer several benefits to investors:

  • Diversification

InvITs with multiple assets present individuals with an opportunity to diversify their investment portfolio. Such a feature directly helps lower associated risks and further allows investors to generate steady returns in the long run.

  • Leads to a fixed income

The option to redistribute risks and accrue a fixed income serves as a reassuring alternative for generating fixed income, especially for retirees. Also, including such an investment tool would help those who intend to plan retirement effectively.

  • Liquidity

Generally, it is easy to enter or exit from an infrastructure investment trust, which directly enhances their liquidity aspect. However, small investors may find it taxing to sell a high-valued property quickly.

  • Quality asset management

InvITs offers investors the opportunity to get their assets managed professionally. It not only ensures effective management and allocation of resources but also helps to prevent fragmentation of holdings.

Nevertheless, the pointers below help to understand how different elements tend to benefit by investing in an infrastructure investment trust.

  • Investors

Parking funds into this investment option allows investors to generate fixed returns on the same. For instance, an infrastructure investment trust has to distribute 90% of its total net cash flow to its investors. It means that investors can generate steady earnings throughout the course of investment.

Additionally, investors also receive dividend income on their investment in case the InvITs have surplus cash flow.

  • Promoters

By investing in InvITs, promoters would be able to lower their debt burden significantly via an asset sale. Further, promoters can use the proceeds to reinvest in other portfolio projects.

Disadvantages of InvITs

There are certain drawbacks to parking funds in InvITs as well. In order to make the most of such an investing option, individuals should weigh the pros and cons wisely in advance, to have a better experience.

  • Regulatory risk

Even the slightest change in the regulatory framework like taxation or policies concerning the infrastructure sector would have a ripple effect on InvITs.

  • Inflation risk

A high rate of inflation has a strong impact on the performance of infrastructure investment trusts. For instance, inflation may increase the sector’s operating cost. Further, an increase in the toll rates would lower the prospect of generating substantial returns.

  • Asset risk

Typically, investment in infrastructure has a long gestation period, and hence the process of generating returns is often delayed. Such a delay not only takes a toll on the cash flow but further hampers profit projections.

InvITs in India : Prospects

It is anticipated that investment in InvITs in India have a promising future and may prove beneficial in these following ways.

  1. Existing projects would be provided with substantial refinancing options in the long run.
  2. It would help disengage developer’s capital to facilitate reinvestment towards new infrastructure projects.
  3. It is expected to facilitate the refinancing of current debt with cost-effective capital for the long term.
  4. It would encourage international investors to invest in the Indian infrastructure sector.
  5. Prospects of increasing opportunity to diversify an investment portfolio with the help of quality infrastructure assets remain.

GAIL and InvIT

Under the asset monetisation exercise announced by the Centre, the country’s oil sector PSUs are prepared to float an infrastructure investment trust (InvIT) and mobilise resources for fresh capital investment.

Gas transportation utility Gail India is expected to set up the InvIT in the oil sector in the next financial year. It is deemed to house some of the gas pipeline infrastructure created by the company.

This is said to help Gail mobilise over INR 20,000 crore through this route that could be helpful in developing new pipeline infrastructure that would help the country in developing a gas based economy.

Two other oil public sector undertakings (PSUs)- HPCL and IndianOil, may also set up InvIT at a later stage.

While Gail and HPCL will focus on monetising their pipeline infrastructure through the investment trusts, IndianOil proposes to do so in the case of its hydrogen producing units as well as product pipelines that would be hived off into an InvIT.

The investment trust route may be new for the oil sector but power sector transmission utility PowerGrid has already put some of its assets for monetisation under the InvIT set up by it earlier. Other large PSUs will also be encouraged to take this route.

Asset monetisation is a crucial aspect of the disinvestment exercise for FY22. Though this normally does not provide the Centre with large gains on PSU assets, it enables the entries to start a fresh capex cycle based on fund mobilisation through the route.

NHAI: Readying Draft prospectus for first InvIT

The National Highways Authority of India (NHAI) has filed draft papers with markets regulator SEBI to set up an Infrastructure Investment Trust (InvIT) to raise INR 5,100 crore through fresh issue, as per the draft papers filed with the Securities and Exchange Board of India (Sebi). There would also be an offer-for-sale, in addition.

In May 2017, road developer IRB Infrastructure Developer Ltd rolled out the first IPO for an infrastructure investment trust—IRB InvIT Fund—raising INR 5,033 crore. Transmission projects developer Sterlite Power Grid launched the IPO of its infrastructure investment trust—India Grid Trust—raising INR 2,250 crore.

The primary objective of InvITs is to bolster and promote the infrastructure sector of India by encouraging more individuals to invest in it.

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