Issuance of Infrastructure Investment Trusts (InvITs) India has been growing to finance infrastructure projects and for investors to invest in a diversified portfolio of infrastructure assets. In India, the issuance of InvITs began in 2016 with several successful issuances by India Infrastructure Trust, IRB InvIT Fund, National Highways Infra Trust, and Bharat Highway InvIT, among others.

In 2019, the government allowed the issuance of InvITs in the power sector, which led to the issuance of InvITs such as Power Grid Infrastructure Investment Trust. As per SEBI data, as on Jan 29, 2023, there are 19 registered InvITs, of which around 5 InvITs are listed on stock exchanges.

What Exactly Are InvITs?

Infrastructure developers create and promote an 'Investment Trust' that owns, operates, and invests in ongoing or completed infrastructure projects. An investment trust is a vehicle created primarily to invest in revenue-generating assets, and such trusts created for infrastructure projects are referred to as InvITs.

InvITs cover infra projects such as bridges, highways, power, telecom, and energy.

InvITs collect a pool of money from institutional and retail investors to participate directly in the infrastructure projects and allot units to investors like mutual funds that offer regular income through dividends or interest and moderate long-term capital appreciation.

The units offered by public InvITs are to be mandatorily listed on exchanges and are traded on the stock exchanges just like equity shares of any listed company. The units are traded based on their net asset value (NAV), like mutual funds.

An Investment Manager professionally manages such Investment Trusts, and advances the money in infrastructure projects or Special Purpose Vehicle (SPV) holding infrastructure assets.

Source: SEBI presentation

• Sponsor (infrastructure companies) sets up an InvIT and should hold 15% of the units with a lock-in period of three years from the date of issuance.
• Trustee is appointed by the sponsor and is responsible for ensuring compliance of the InvIT.
• An investment manager is appointed, who is responsible for investment decisions and overseeing the project manager's activities.
• A project manager takes responsibility for the operation of the underlying assets of InvIT.
• Investors are referred to as unitholders and make investments into InvITs by subscribing to its units?
• InvIT is made up of a series of tiers.
• The Sponsor creates the InvIT, which then makes investments into qualifying infrastructure projects directly or through special purpose vehicles. InvIT invests in special purpose vehicles in the form of equity and debt.

Some Salient Features In SEBI's Regulation Of InvITs

1) At least 80% of the value of public InvIT to be invested in completed and revenue-generating infrastructure projects.

2) Trusts to have a pass-through structure, i.e., they are not taxed.

3) Key unitholders have rights to vote on matters related to material acquisition or borrowing, appointment or change of investment manager, induction or exit of a sponsor.

4) SEBI has made it mandatory to distribute 90% of the net distributable cash flow to unit holders.

5) Net borrowing of an InvIT is capped at 70% of AUM in case of an AAA rating.

Need For InvITs

India is a developing country, and infrastructure is critical in developing economies.

A well-developed infrastructure propels a country's overall development. It also facilitates a consistent inflow of private and foreign investments, thereby augmenting the capital base available for the long-term growth of key sectors in an economy and its own.

To fund capital-intensive infrastructure projects, additional financing channels must be put in place. InvITs provide an essential financing channel to raise certain portions of money through debt that benefits both the sponsors and investors.

Here are some of the key benefits for sponsors:

• Monetise revenue-generating infrastructure assets
• Low cost of capital by tapping the right set of long-term investors
• Beneficial tax treatment, including exemption from dividend distribution tax and relaxation of capital gains tax
• Create a diverse source of funding infra-assets

Investor Base

Any domestic, foreign, retail, or institutional investor can buy InvIT units in India.

Earlier in India, investors could only invest or participate in infrastructure growth projects by owning equity shares of infra companies or investing in infrastructure mutual fund schemes.

The minimum subscription for public InvITs is in the range of ₹10,000 to ₹15,000, and the trading lot is of 1 unit.

Now with the option to invest in investment trusts of infrastructure, investors may avail following benefits:

• Invest in the Indian growth story without owning an asset.
• Tax exemption on dividend income if the InvITs did not take tax concession.
• No capital gains tax if the units are held for more than three years that are sold through stock exchanges.
• Diversify investment portfolio.
• Generate a stable income stream through InvITs.

Along with benefits, there are certain risks associated with InvITs. Some of such risks are:

• Operational risk may arise due to delay in collection, traffic, tariff risk or certain ad hoc expenses faced by InvITs' underlying projects.
• Refinancing risk that debt of the underlying SPVs of infra projects may have to be refinanced at an unusually high cost.
• Regulatory risks may arise if SEBI changes regulations, as infrastructure is a highly regulated sector in India.

Sources:Securities and Exchange Board of India, Media reports, Credit rating agencies