Infrastructure and real estate are two crucial sectors that underpin the sustained economic growth and development of a nation. They have critical importance for a country’s advancement both on economic and social parameters. However, these two sectors need significant stimulus from the Government, perhaps more than others, for sustained growth and orderly development.
The dynamic regulatory regime, introduced after the commencement of the economic liberalization process in the year 1991, has been a cause for the continued growth of the Indian economy, even amid a global financial crisis. The introduction of the InvITs is proof of this regime. Its arrival could not be better when there is an increased focus on infrastructure and real estate development.
Historically, the responsibility of financing this sector has fallen on the banks and financial institutions. However, the situation has changed since InvITs have been attracting private funding through private equity investments.
InvITs provide an opportunity to participate in infrastructure and real estate financing through a stable and liquid instrument. It also promotes a more efficient governance structure. It allows smaller and non-institutional investors to participate in infrastructure and real estate financing. Investors also reap the benefits of growth in these sectors through a marketable instrument, which is less prone to the volatility inherent in equity investments.
With the introduction of the InvITs, Indian Capital Markets have overcome the global competitive disadvantage. It has provided Indian companies with a much needed additional avenue for financing. The Government has provided a mostly favorable tax regime and liberalized the ability to invest in InvITs, making these products more attractive to investors.
BACKGROUND
What’s an InvIT?
An Infrastructure Investment Trust is a trust under the Trusts Act. The registration of InvIT is under the Registration Act. Under the Trusts Act, Trust is an obligation attached to the ownership of property. The author creates the obligation, accepted by the property owner, and owed to the beneficiaries identified by the Trust Deed. In InvITs, Sponsor establishes a trust, The Trustee owns the property, and the beneficiaries are the Unitholders of the InvIT.
For the InvIT Regulations, “Infrastructure” includes all the infrastructure sub-sectors specified in the Harmonized Master List of Infrastructure Sub Sectors issued by the Ministry of Finance. Such infrastructure sub-sectors include:
Roads and Bridges;
Ports;
Airports;
Metros;
Electricity Generation, Transmission or Distribution;
Telecommunication Services;
Telecommunication Towers;
Capital Stock of Hospitals and Educational Institutions;
Hotels and Convention Centers and
Features of an InvIT:
The value of the infrastructure projects and other assets owned by an InvIT shall be at least 500 crore rupees.
InvITs are allowed to borrow up to 49% of their underlying assets.
InvITs that propose to invest at least 80% of the value of their underlying assets in the completed Infrastructure projects shall raise funds only through public issue of funds.
They shall have at least 20 investors and a minimum 25% public float. They shall distribute not less than 90% of the total cash earnings to the investors.
InvITs that seek to invest more than 10% of the value of their assets in under construction infrastructure projects can raise funds only through private placement from Qualified Institutional Buyers or Body Corporate.
They shall have a minimum of 5 investors, with each holding not more than 25% of the units. They shall distribute not less than 90% of their total earnings to the investors.
Listing is mandatory for both publicly offered and privately placed InvITs.
LEGISLATION
The Key laws applicable to InvITs include the InvIT Regulations, the InvIT Guidelines, the Trusts Act, the Registrations Act, the FEMA, and the Income Tax Act, 1961.
ELIGIBILITY:
According to the regulations, investors can comprise insurance and pension funds, domestic institutional investors (like mutual funds or banks), foreign institutional investors, HUFs, and Individuals with a high income. The IPO has a minimum application size of Rs 10 Lacs, and the minimum trading lot is Rs 10 Lacs post listing of the units of the InvIT.
PROCEDURE:
Unitholders are investors who purchase the Units of the InvIT. They invest in the primary market at the Initial Public Offering or by purchasing Units from the second-hand marketplace.
Each InvIT comprises of a trustee who is a SEBI registered debenture trustee. The Trustee holds the InvIT Assets in Trust for the Unitholders’ benefit and ensures that the fund’s investment policies comply with the regulations.
PARTIES INVOLVED IN THE ESTABLISHMENT OF AN InvIT
The parties involved in establishing an InvIT are the Sponsor, the Trustee, the Investment Manager, and the Project Manager, each with distinct duties, roles, and responsibilities.
Sponsor: An InvIT, being a trust, the Sponsor of an InvIT is the author of the Trust required to transfer the initial portfolio of assets to InvIT.
A sponsor may be a company, an LLP, or a body corporate. Regarding the Public-Private Partnership (PPP), the Sponsor is an infrastructure developer or a Special Purpose Vehicle (SPV) holding a concession agreement. If the Sponsor is a body corporate, its net worth should not be less than 100 Crore Rupees.
A Sponsor has to hold at least 25% in the InvIT for at least three years except for the cases where a regulatory requirement or concession agreement requires the Sponsor to hold a certain minimum percentage in the underlying SPV. In such cases, the consolidated value of such Sponsor Holding the underlying SPV and in the InvIT cannot be less than 25% of the value of units of InvIT on a post-issue basis.
Trustee: The Trustee is the owner of the InvIT Assets, which he holds in a trust. The Trustee’s required eligibility includes: The Trustee should be a registered trustee under the SEBI Debentures Trustee Regulations, and the Trustee should not be an associate of the Sponsor, the Investment Manager, or the Project Manager.
Investment Manager: The Investment Manager undertakes the investment decisions for the InvIT, manages the Assets of the Trust, and initiates activities related to the general corporate aspects of an InvIT. The Investment Manager may be a company, an LLP, or a body corporate. If the Investment Manager is a body corporate or a company, its net worth should not be less than 10 Crore Rupees.
Project Manager: The Project manager is the entity responsible for executing infrastructure projects and the achieiving project milestones under the concession agreement or other relevant project documents.
BENEFITS OF INVESTING IN InvITs:
Diversification: With the multiple underlying assets of an InvIT, investors get an opportunity to diversify their investment portfolios. For instance, an InvIT has to distribute 90% of its total net cash flow to its investors. Such an option ensures risk minimization and allows investors to generate stable dividend payments in the long run.
Generates a fixed income: Redistribution of risk and generation of a steady income acts as a healthy alternative for accruing regular returns, especially for retirees. Having such an investment in the portfolio would help investors who intend to plan retirement effectively.
Liquidity: The liquidity aspect of an infrastructure investment trust is primarily enhanced because, generally, it is easy to enter or exit from them. Although, small investors may find it tedious to sell off a high-priced asset in a short period.
Management of Assets: Generally, the underlying assets of an InvIT are managed by professionals with a long-standing history of portfolio management. Such prior experience provides an opportunity for investors to ensure effective management and allocation of resources.
The benefit to the Promoters: By investing in InvITs, promoters would significantly minimize the burden by the sale of an asset. The proceeds of the sale can fund other projects. There are several infrastructure companies whose funds are locked up in completed infrastructure projects. As a result, they cannot be used to promote growth in the country’s infrastructure sector. InvITs enable the refinance of these developments. Such instruments create an attractive opportunity for smaller investors to benefit from the development of these projects.
InvITs further promote the flow of foreign investment and finance directly into the Indian infrastructure sector.
NOTE: When evaluating an infrastructure investment trust, it is imperative to study its underlying assets and holdings before investing. Likewise, it is crucial to understand the Trust’s intrinsic value by using various valuation techniques. Just like InvITS, if you would like to invest in stock market & mutual funds, want to know how to do it and which broker you should select, then visit Select by Finology.
DRAWBACKS:
Although InvITs provides a good investment option with long term steady gains over time, there are inevitable setbacks in operating. A few of them are listed below:
There is a lack of transparency.
The underlying asset’s failure risk because of a plethora of inherent equity-associated risks gets transferred to the investors.
The investors have no easy way to understand the risk since all the speculations of cash flow are merely that – speculations. If the projections for the upcoming years prove false, the Uniholders’ dividend payment structure will be a catastrophe.
The investors do not have real knowledge of the underlying assets’ net worth. The initial Valuation Report that suggests that the project will generate a certain amount of returns over the period cannot be relied solely upon as real estate projects are subject to numerous changes over the long periods. So, the longer the term of the project, the greater the risk. For instance, the construction of a metro project will minimize the highways’ traffic and affect the payment of toll. Such a model subsequently affects the revenue of the infrastructure company, and the returns on the project take a big hit. If a road project becomes unviable, the investors in InvIT will lose money if the tolls received fall.
CONCLUSION
To sum it up, the InvIT market is relatively nascent in India. It is in an evolving phase, with only a handful of InvITs registered currently. However, with the Government’s appropriate stimulus in the infrastructure segment and a boost in the economy over the period, InvIT can prove a suitable investment option for several investors.
In the backdrop of India’s massive infrastructure financing needs, it is suggestible that more number of InvITs get registered throughout the future.