InvITs: A Good Investment Option?

 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 

1. 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

1. 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. 

1. 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. 

1. 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.

1. 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. 
2. 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: 

1. 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. 
2. 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. 
3. 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. 
4. 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. 
5. 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. 

1. 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: 

1. There is a lack of transparency. 
2. The underlying asset's failure risk because of a plethora of inherent equity-associated  risks gets transferred to the investors. 
3. 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. 
4. 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.