Critical to any emerging economy are two significant sectors – the country's infrastructure and real estate. And keeping these two sectors in mind, it must be noted that a well-build infrastructural arrangement thrusts a country's overall development. Having robust infrastructure is also crucial in facilitating a steady inflow of foreign investments and private equity.
A fresh inflow of funds is vital in expanding the capital base necessary for the growth of these crucial sectors in a country's economy. Besides, such investments are also essential in boosting the growth of the segments in a sustained manner.
Understanding Infrastructure Investment Trust (InvITs)
To know what is invit, it can help to understand and know the invit full form. Regarded as a collective investment scheme similar to a mutual fund, an Infrastructure Investment Trust (InvIT) is crucial in enabling the direct investment of money from individuals and institutional investors towards infrastructure projects. Keeping in mind the vast infrastructure needs of the country, InvITs can allow developers of infrastructure projects to monetize their assets by drawing numerous projects under a single trust structure or infrastructure investment fund.
Falling under the ambit of the SEBI, InvITs are regulated the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Detailed guidelines on the public issue of units of InvITs are declared in SEBI's latest circular.
What is an infrastructure investment trust?
As a first of its kind long-term instrument, InvITs can be structured as funds with an extended tenure or as an open-end structure. Currently, government securities (G-Secs) are the only other instruments with a very long tenure like InvITs.
As a structure built in a tiered format, InVITs have a sponsor at the helm. This sponsor sets up the InvIT that further invests into suitable infrastructure schemes directly or through special-purpose vehicles (SPVs). With regards to public-private partnership projects, InvIT investments can only be made through SPVs.
Latest developments in InvITs
In 2016, India Grid Trust filed its the first draft offer document for India's first-ever power sector InvIT with SEBI. Following this, the first public offerings of InvITs came to the stock market in 2017 from IRB Infrastructure Developers Ltd, and Sterlite Power Grid.
Interestingly, in 2019, several, large, private InvITs such as Reliance Industries Limited setup investment trusts for its gas pipelines and telecom towers worth Rs. 38,000 crores. Early this year, the Infrastructure Leasing and Financial Services (IL&FS) group proposed creating an InvIT to house the group's road assets and compensate lenders by offering units at zero cost.
Currently, five public infrastructure trusts have raised approximately Rs 40,000 crores. A recent report by CRISIL revealed that InvIT issuance could further grow fivefold to Rs 2 lakh crore within the next two years.
Characteristics
Under SEBI regulations, InvITs must ensure they distribute 90% of their net cash flows to investors. A leverage of 49% is placed on the InvITs net asset value.
For publicly placed InvITs, or under construction assets, a cap is placed on its exposure. Sponsors responsible for setting up the InvITs are also accountable for appointing the trustees.
The sponsor holds a minimum of 15% of the units issued by the InvITs, with a lock-in period of three years from the date of its issuance. Under the InvITs regulations, companies are also required to maintain specific investment ratios, such as 80% of investments in completed and revenue-generating assets.
The specified minimum investment limits are pegged at Rs. 10 lakh per investor, as can be seen in all the InvITs filed so far.
The investment in such projects helps investors in reaping a decent portion of the income as yields. However, given that regulations in this avenue are new, most InvITs that are likely to raise money will have a negligible or a very short track record.
Distribution of dividends
InvITs are required to distribute dividends regularly. These dividends must be distributed once in every six months.
The amount available for distribution depends on the interest income or the InvITs own dividend, as well as principal payments from its portfolio.
If you are an eligible non-resident investor, it can help to note that distributions, dividends and refunds if any will be payable in Indian rupees only.
The Union Budget 2020 and InvITs
To ensure that tax treatment is uniform across InvITs, the Union Budget 2020 extended the definition of business trusts to include unlisted InvITs as well.
This move could help in further boosting investments in the infrastructure space. Also, the recently announced Union Budget 2020 accorded tax passes through status to private unlisted InvITs. Until recently, only publicly listed InvITs were granted tax exemptions.
Given the tax exemption for the private InvIT structure, sponsors and investors can now look to divest their infrastructure assets through this route. Until recently, InvITs could be placed privately but had to be listed on exchanges. This meant that several regulations had to be dealt with regarding insider-trading and price-sensitive information. Now, with privately placed InVITs, these are done away with as they are privately negotiated structures.
Tax exemptions for InvITs
As an investor in InvITs, you can benefit from favourable tax exemptions, such as dividend distribution tax. As a unitholder of InvITs, you will be required to pay tax on the dividend income at the appropriate income tax rate. But, if you hold InvITs units for over three years, you can enjoy tax exemption on capital gains and dividend income if sold through the stock exchange.
However, NRI unitholders have to pay a tiny withholding tax for interest income.
Besides, you can also benefit from the pass-through structure of InvITs authorising the allocation of a minimum 90% of net-distributable cash and zero dividend distribution tax.
Importance of InvITs
Since infrastructure is an integral component of a country, it requires requisite public funds to stimulate their growth. This is why additional channels of financing, such as InvITs are established. As an innovative vehicle, InvITs are crucial in monetizing revenue-generating infrastructure assets and helping investors or unitholders to invest in such projects without possessing them.
As a monetisation medium, developers can profit from InvITs by using investor capital to fund new infrastructure projects. In turn, investors or unitholders receive liquidity to investors when the units of the project are listed on stock exchanges.
Conclusion
With the new tax pass-through benefit, large investors such as pensions and sovereigns can now consider private InVITs to become attractive investment structures. Given its yield generating potential, regulated by SEBI, easy liquidity and a compulsory requirement to distribute cash regularly as and when produced, InVITs hold the possibility of becoming a lucrative and promising investment avenue.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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