As Power Grid InvIT and India Grid InvIT are in the news for an Initial Public Offering and Non Convertible Debentures, let us look at what an InvIT is.
An Infrastructure Investment Trust, or InvIT, has just one objective: To offer a direct investment route to individuals and institutional investors into infrastructure projects. In exchange, they earn a small portion of the income as return. In this manner, it closely resembles mutual funds and real estate investment trusts, or REITs.
Regulation
InvITs are regulated by the Securities and Exchange Board of India, or SEBI. Registration and regulation of InvITs falls under SEBI (Infrastructure Investment Trusts) Regulations, 2014. Or, more accurately, SEBI (Infrastructure Investment Trusts) (Amendment) Regulations, 2016.
Here is the list of InvITs in India.
Structure
An InvIT is a collective investment scheme, just like a mutual fund, and is set up in the form of a trust.
The InvIT is designed as a tiered structure: a trustee, a sponsor, an investment manager and a project manager. SEBI lays down guidelines as to which entity can qualify for each, in terms of experience in relevant areas and net worth and assets owned. As well as each of their duties and responsibilities.
The sponsor sets up the InvIT and appoints the trustee. The role of the trustee is supervisory in nature, overseeing the activities of the investment manager and the project manager.
The actual investment, divestment and related decisions are to be made by the investment manager. This is an entity or limited liability partnership (LLP) or organisation that supervises the assets and investments of the InvIT and guarantees activities of the InvIT.
The project manager is primarily responsible for managing the assets of the InvIT and is under an obligation to ensure that projects get completed on time. The duty of the project manager is execution and accomplishment of project.
Working
To facilitate investment in infrastructure, InvITs enable companies monetise their infrastructure assets and provide a channel for investors to buy a stake in infrastructure projects.
The money raised through the fund can be used only to buy infrastructure assets – equity or debt. Of the total assets bought, the fund is required to invest at least 80% in a revenue generating infrastructure asset. The rest can be invested in under-construction infrastructure asset or securities of infrastructure companies.
Let's say we have an infrastructure company that specialises in constructing roads and highways on a BOT basis, which is an acronym for Build-Operate-Transfer (BOT) projects. What does this mean? It means that the company will build the road and operate it for a period of time, which could span a few decades. Over this period, it will collect toll as its income. On completion of this tenure, will transfer it to the government.
Now let’s say that the company needs money for more construction. It will have to raise it either by selling shares (equity), taking a loan from the bank (debt) or borrowing by issuing fixed income instruments (debentures, fixed deposits). Or, it can opt for an InvIT.
Let’s further assume that it has seven operational road assets with a cash flow. It hives off three into a trust - InvIT. The latter can now come up with an initial public offering (IPO) or a non-convertible debenture (NCD) to raise capital, as is currently happening.
With the money, it can buy more operational assets from the company or other infrastructure companies. But, as mentioned above, at least 80% of its investments must be in revenue generating infrastructure assets.
What would be the reason to invest in an InvIT?
Wealth manager Kirtan Shah says that there are two aspects.
Investors should get regular dividends. The cashflows that the InvIT receives (90% of it after expenses), needs to be given out to the shareholders every six months.
Moreover, the InvIT price can move up in the market, offering a capital appreciation. While capital gains tax is taxed at 15% for holding below 3 years (short term capital gains) and 10% for above 3 years (long term capital gains). Incidentally, the only listed InvIT in India has been IndiaGrid InvIT. It listed on June 5, 2017 and the closing price on that day was Rs 96.55. The closing price on April 26 was Rs 125.95.