“You and I come by road or rail, but economists travel on infrastructure” – Margret Thatcher
Wondered how toll plazas in roads can lead to the progress of a country. Does it occur to your mind the way toll collections contribute to encouragement for investors? According to the most recent reports of the Finance Ministry, India needs to spend $ 4.5 trillion on infrastructure by 2030 to realize the vision of a $5 trillion economy by 2025. Special emphasis on structural reforms and foundation establishes the way for investments in diverse sectors. This is where Infrastructure investment plays a vital role. In fact, it is one of the stepping stones where everything is built.
Every country needs a defined infrastructure that can provide adequate facilities for each individual and which paves the way for capital mobilisation. While addressing the public on the occasion of the Independence Day of 2019, Prime Minister Narendra Modi announced that Rs 100 lakh crore would be invested in infrastructure over the next five years. An initiative called the National Infrastructure Pipeline was launched to make things efficient. Over the years our nation would invest a large amount of money each year for more flexible and comprehensive development.
What is infrastructure?
Infrastructure is one of the pertinent requisites for long term growth. There is no hard and fast rule to define infrastructure. As far as understood from the definition of Economic Survey (2000-2001) these are the sectors that include infrastructure:
- Coal, petroleum and cement production
National Investment and Infrastructure Fund, Toll Operate TransferModel, Foreign Direct Investment, Mutual Funds were some of the various financial instruments involved in investing in infrastructure-related projects. Innovations of modern times changed the outlook of the sector to engage different schemes that involve a large scale investor participation. Infrastructure Investment Trust is one such model where investments are drawn. Called as InvITs, it is an investment vehicle which aggregates investments and returns come back for investors.
Infrastructure Investment Trust (InvITs)
Infrastructure Investment Trusts are trusts established under the Indian trusts Act,1882 for the purpose of investment in infrastructure. InvITs, regulated by SEBI (InvIT) Regulations 2014 are listed on Indian Stock Exchanges and act as a platform for investors where they can invest in revenue-generating infrastructure assets directly or through special purpose vehicles (SPV), earn a stable return with the opportunities of diversification in a single unit and could be considered as a contribution to the development of the country. The money raised through the fund is not only used to invest in new projects but also for assets that provide revenue for at least one year. To ensure an understanding of InvIT, this paper will give an overview of the possibilities and challenges pertaining to InvITs.
Who are the investors?
The biggest recognition of InvITs is the plethora of investor participants. Even retail investors can be a part of the assets. Over the last few years Individuals, Institutions, Pension funds, Insurance Companies Foreign investors are the major investors. Minimum amounts for investment or subscription of units have been clearly laid down in the SEBI regulations. There has been an increase in the engagement of international investors into the InvITs.To boost investment government has also relaxed certain provisions for foreign portfolio investors. There are various safeguards by regulatory authorities to protect the financial risk of investors.
InvITs – hybrid model?
The diverse nature of investments makes InvITs more attractive in the market. Investment conditions of SEBI prescribe Public InvITs to invest at least 80% in completed and revenue-generating infrastructure projects and for Private InvITs at least 80% is to be invested in eligible infrastructure projects. The other 20% of InvIT is required to be invested in under-construction infrastructure projects and financial instruments which include government securities, mutual funds, or other market instruments. InvITs are a blend of both equity and debt assets and the returns for the InvIT holders are in the form of dividends, capital gains, interest income and other income from the investment fund.
Classification of InvITs
Private InvITs Public InvITs
Initial public offer.
Institutional buyers and Body Corporate.
Retail Investors, Institutions and Body Corporate.
Minimum Subscription amount is 1 crore.
Minimum Subscription amount is 1 lakh.
No advertisement of issue of units.
Advertisements for the issue of units.
Minimum number of unitholders shall be five (Each can hold not more than twenty-five percent of units).
Minimum number of unitholders shall be twenty (Each can hold not more than twenty-five percent of units).
Mandatory listed on stock exchanges within 30 working days from date of allotment.
Mandatory listed on stock exchanges within 12 working days from the date of closure.
Eg) India Grid InvIt and IRB InVIT.
For Public-Private Partnership Infrastructure Projects, it can be invested in InvITs only through special purpose vehicles. Also, there is a third category of InvITs called unlisted private InvITs. It was introduced by SEBI in the year 2019. As per the SEBI (Amendment) Regulations, 2019, minimum investment in these units by an investor is Rs 1 crore and details regarding the number of investors, leverage shall be left to the discretion of the issuer of InvIT.
Structure of InvIT
What differentiates InvITs from other financial instruments is its well-established structure. Mainly there are four parties in an InvIT. They collectively hold the InvIT together. These are the fundamental mainstays of an InvIT:
1) Trustee – Person who holds InvITs assets in trust for the benefit of the unitholders. The trustee is required to be registered with SEBI under the Securities and Exchange Board of India ( Debenture Trustees ) Regulations, 1993. The rights and responsibilities of the trustee are specifically mentioned in the Act. The trustee shall oversee the activities of other members in an InvIT and shall ensure the compliance of objectives specified in the Trust deed.
2) Sponsor – Any company or LLP or body corporate who sets up the InvIT and in case of Public-Private partnership projects, sponsor shall mean the infrastructure developer or a special purpose vehicle holding the concession agreement. If the Sponsor is a body corporate or company, the net worth must not be less than 100 crores. The sponsor sets up the InvIT and should have a sound track record of at least five years in infrastructure or as a part of fund management in the sector.
3) Investment Manager – Company or LLP or body corporate which manages assets and investments of the InvIT. An investment management agreement is formed between the investment manager and trustee which establishes the responsibilities of the former. If it is a body corporate or company net worth must not be less than rupees 10 crores.
4) Project Manager – He is appointed for the execution of the infrastructure projects. The Project Manager enters into a project management agreement and it is his obligation to complete all infrastructure projects on time and to ensure the maintenance, operation and implementation of such projects.
Benefits of Infrastructure Investment Trust
Simply put, monetization refers to the process of turning a non-revenue generating item into cash or it is a way of liquidating an asset. InvIT is one such mechanism that can be utilized for the monetization of infrastructure assets. By this exercise government or companies can meet cash for their infrastructure projects or developments. For example, NHAI can set up an InvIT for highway or road projects. The trust can raise funds from public or institutional investors and returns generated by these projects will be returned to the investors in the form of dividends or other income.
- Infrastructure developers and companies
For every business or various projects, adequate funding is one of the critical factors. As the returns from projects take a longer duration, companies struggle to identify funds for the projects. In a way, banks also might not consider providing credit for the companies. InvITs help the owners of projects to acquire an amount for the infrastructure assets. InvIT is one of the suitable finance models where infrastructure companies can arrange appropriate funds at the right time.
Canadian Pension Fund Ontario Municipal Employees Retirement System has announced an investment of $121 million for a 22.4 stake in IndiaInfravit Trust. Investors’ portfolios include Canada Pension Plan Investment Board and Allianz Capital Partners. According to SEBI officials, “Foreign investors are keen on investing in InvITs”. InvITs can create a platform for investors in the infrastructure space. SEBI mandates InvITs to distribute a minimum of 90 percent of the earnings to investors at least semi-annually. This, in turn, will draw investors and for diversification of assets where investors can invest in a single unit which reduces the risk and ensures quite stable returns over the long haul.
- Checks and balances by SEBI
InvIT is governed by SEBI through SEBI (Infrastructure Investment Trusts) Regulations 2014. SEBI has introduced various guidelines for the functioning of invITs. By amending the regulations in 2019 and 2020, the regulatory authority has presented significant changes. SEBI has mandated invITs to list in recognized stock exchanges and follow a rigid standard of procedure. Since InvITs are under a regulatory framework, it will enhance confidence among investors and developers. The board tries to protect the interests of investors and ensure prospects of transparent and accountable transactions in the market.
Are there any challenges for InvITs?
- Early stages
The government has proposed the introduction of InvITs in the Budget 2013 – 2014. India’s first InvIT made its debut in the year 2017. As a novel financial instrument, it is time-consuming to comprehend the economics of a financial product. A disciplined course of study is required to understand the potential of the InvIT and assess the opportunities and risks associated with the product. Recent amendments and changes by SEBI have encouraged more infrastructure companies to establish InvITs. The instrument is somewhat complex and needs a better understanding and acceptance among investors.
- Investor education
Infrastructure is a compound segment. Each transaction is different. Assets, cashflows, returns tend to be in an unpredictable nature. So investors have to have a deep education to understand the product. There is a dire need for investor education where investors can better assess and study the product. Credit rating agency,ICRA, has noted that the complex nature of InvIT limits participation from all investor classes and it requires a sophisticated understanding of the underlying assets.
- Infrastructure sector risks
There are specific risks that are erratic in the infrastructure sector. It is a strenuous task to comprehend the challenges in a particular area. For example, the returns and income from power and road sectors are completely different. It involves a great deal to understand different economic variables, future projections or returns. Moreover, the projects are in the long run and there are associated political and bureaucratic risks involved. Specifically, IRB InvIT is a trust owning a portfolio of 7 Toll Road assets. The trust revenues rely on movement in toll traffic which is unforeseen and is one of the greatest concerns.
Some positive signs
Business Trust means a trust registered as an Infrastructure Investment Trust under SEBI(InvIT) Regulations 2014 or a Real Estate Investment Trust under SEBI(REIT) Regulations 2014 made under the Securities and Exchange Board of India Act 1992, whose units are required to be listed on a recognised stock exchange in India. In a move to encourage private placement of InvITs, SEBI has proposed to amend the definition of business trust for the removal of mandatory listing requirements.
InvITs attract a large amount of participation from retail or domestic individual investors. Earlier the minimum subscription amount for retail investors was Rs 10 lakh. As per SEBI regulations 2019, the minimum subscription has reduced to 1 lakh. This will accelerate confidence among small investors. Retail investors were allowed only to invest through mutual funds or investment. In a move to boost up the retail investors SEBI has reduced InvIT limit in these instruments.
Recently SEBI has relaxed the leverage norms for InvITs. The regulatory authority has enhanced leverage cap to 70 % from 49% for trusts retaining “AAA” credit rating along with a track record of six continuous distributions to unitholders. New initiatives can draw marquee investors like Pension and Sovereign wealth funds. But the changes in leverage limit are not applicable for Private and unlisted InvIT.
The new regulations by SEBI have inspired confidence among investors. At the same time, investor concerns must be addressed. The first InvIT in India was floated in the year 2017. Till now only few InvITs have been privately and publicly listed. There is no denying the fact that the infrastructure sector is massive. InvITs have caught the attention of many domestic and foreign investors. National Highway Authority of India is the first government or semi-government body that has chosen to monetize infrastructure assets through InvIT. NHAI plans to raise Rs 40,000 crore through InvIT. More importantly, a profound understanding by the investors is needed about the product and its transactions in the market.
COVID – 19 Pandemic has created a bit of uncertainty in the minds of investors. But despite the current uncertainty, InvITs are a promising financial route. Investment in infrastructure is like a ladder and InvIT is one of the initial steps of the ladder. The government should try to make an assessment of the instrument and ensure a transparent atmosphere for investors. We need a regulatory environment that promotes InvITs and infrastructure.
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