Abstract

Infrastructure Investment Trusts, also known as InvITs, are gradually gaining traction amongst the investors owing to its diverse nature of investments. InvITs can be utilised for monetisation of infrastructure assets which are likely to acquire infrastructure assets worth more than 4 lakh crores in the next five years.

This blog aims to bring a brief perspective on InvITs- its operational structure and regulatory framework. Further, the blog also features the reasons behind InvITs being one of the most attractive investment tools. Therefore, at a time when infrastructure growth is the need of the hour, an innovative and novel mode of investment like this can prove to be a turning point for the infrastructure investments in India.

Introduction

The economic history of nations indicates that if a country needs to attract investments and achieve its GDP targets, it becomes inevitable to push for and focus on infrastructure growth. The significance of this sector is evident from the fact that it figures as one of the Sustainable Development Goals (SDGs) [1] adopted by the United Nations Member states in 2015 to ensure peace and prosperity on the planet by 2030. Infrastructure projects being capital intensive require robust policies and innovative financing/ refinancing tools to get the momentum going. In India, banks have been dealing with hurdles such as Non-Performing Assets (NPAs) along with compliance with provisioning norms compelling them to refrain from funding big infrastructure projects. The Indian government has been proactively taking measures and bringing in policy changes to attract foreign investments and private equity in the sector. It was highlighted in the Union Budget for the present financial year that India needs a heavy total of Rs. 100 lakh crore over the next five years for the growth of its infrastructure [2].

Infrastructure Investment Trusts (InvITs) although at a relatively nascent stage in India, has been globally accepted as an investment vehicle in infrastructural assets such as gas pipelines, national and state highways, electricity transmission lines, etc. According to the National Stock Exchange of India- “An Infrastructure Investment Trust (InvITs) is a Collective Investment Scheme [3] similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as a return.”

InvITs are tiered structures consisting of 4 elements viz-

● Trustee: Must be registered with SEBI as a ‘debenture trustee’.

● Sponsor: A body corporate having a net worth of at least Rs. 100 crore. They are also required to hold at least 15% of the total InvITs and serve as Special Purpose Vehicles in the case of PPP projects.

● Investment Manager: Responsible for managing the operational activities related to InvITs.

● Project Manager: Responsible for the actual execution of infrastructure projects.

Regulatory Landscape

InvITs are required to be registered with SEBI and are to be in compliance with the SEBI (Infrastructure Investment Trusts) Regulations, 2014. The government had also brought in taxing provisions under the Income Tax Act, 1961 for InvITs termed as ‘Business Trusts’ in the Finance Act, 2014. SEBI has since made several amendments to the regulations over-time to attract interested investors. In its notification in 2017, SEBI allowed InvITs to raise capital [4] by way of issue of debt securities, added the definition of ‘strategic investor’, and permitted lending to SPV in which the respective InvITs have invested. Further, in its order dated April 22, 2019, SEBI [5] introduced amendments allowing an increase in leverage limits for InvITs. The leverage limit which was earlier 49% has been increased to 70%. The trading lot value has also been reduced from Rs. 5,00,000 to Rs. 1,00,000 to facilitate market liquidity and flexibility in fundraising[6]. SEBI has recently brought in certain amendments in these rules to ease fundraising. SEBI in its circular dated September 28, 2020 [7] “granted certain relaxations for raising equity capital” by listed InvITs keeping in mind the circumstances created due to the ongoing pandemic. It was stated that InvITs are allowed to raise equity capital via institutional placement route keeping a time gap of two weeks between two such operations. It is pertinent to note here that the time gap which was prescribed earlier was that of six months. Amendments regarding the pricing of units for preferential issues have also been made which include a lock-in period of 3 years[8] in case of units allotted on a preferential basis (since the same pricing method has to be followed for all allotments arising out of the approval of the same unit holders). It was also specified in the circular that the units held by the sponsors and locked-in for three years in the past, under InvIT Regulations, shall be taken into account for computation of the lock-in requirement. The minimum subscription amount for a publicly listed InvIT has been lowered to Rs. 1 lakh from Rs. 10 lakh to widen the investor base[9].

Industry Experience

To date, there are 5 operational InvITs registered with SEBI having a total market value of Rs, 60,000 crores [10]. According to Harsh Shah, CEO of IndiGrid, which is an InvIT associated with inter-state power transmission assets in India, there is restricted participation due to the existing investment cap of 5% [11]. IndiGrid, IRB InvIT, and Indinfravit all reflect that there is a low risk while investing in InvITs. IndiGrid has distributed a total amount of Rs. 525 [12] crore since its listing to its unit-holders. Moreover, Reliance Infrastructure, ACME, and ReNew Power are some of the private sector firms that are expected to launch their InvITs in the renewable energy, telecom sector, construction sector, etc. In December 2019 the Cabinet had also approved a proposition by the NHAI to set its own InvIT which allows it to levy a toll on certain identified highways [13] which will further aid the NHAI to raise funds to construct roads across the nation. It will be established as a Trust under the Indian Trust Act, 1882 and the related SEBI regulations. It is noteworthy to mention that these highways will constitute a part of the flagship highway development program, namely Bharatmala Pariyojana launched by the Central government in October 2017. This program aimed at developing 24,800 km of roads for a total investment of Rs. 5,35,000 crore [14]. Therefore, to raise funds, one of the most feasible options for NHAI is to monetize its operational assets and to attract private sector investors.
InvITs as an Attractive Tool

Investing in InvITs entails minimum risk. The factors behind this significant feature are listed
below:

• Tax Exemption: Income like capital gains, dividends from the investments made by the Pension Funds and Sovereign Wealth Funds in the Invit units are specified infrastructure activities are now exempt from income tax which will attract funding from international investors.

• Retail Investors: The infrastructure sector till now has majorly attracted funding only from the institutional investors. The mandatory listing of InvITs and the threshold amount being lowered to Rs. 1 lakh will attract a new class of investors.

• Construction Risk: SEBI mandates InvITs to invest 80% of their assets [15] in completed and revenue-generating projects. This ensures that InvITs are not exposed to the construction/ execution risk which may lead to project completion or cost overruns.

• Win-Win situation: Investing in InvITs creates a win-win situation for investors as well as developers. It serves as an expedient route for infrastructure developers to monetize their assets, unlock equity gains, reduce their debts, and most importantly finance new projects while maintaining their capital structure.

The above features make such investments steady and low-risk accompanied by a receipt of high dividends. Furthermore, it is also easy to enter as well as exit from such an investment, thus enhancing its liquidity. By investing in these, an investor also diversifies his/her investment portfolio which automatically lowers associated risks.

Conclusion

Even though the global pandemic has slowed down the growth of the Indian economy, investments in its infrastructure sector by global investors are highly anticipated. Given that there is a compelling need for infrastructure funding and also the easing of regulations, more and more InvITs are expected to be launched in the coming years. The regulatory authorities have also eased norms and compliance regulations to encourage wider participation. Also, InvITs can act as efficient investment vehicles ensuring long-term funds for infrastructure projects, from both retail investors and foreign institutional funds. It has already been mentioned above that these investment vehicles are beneficial for investors and developers alike as they ensure high yielding returns over a long period.

However, risks associated with such investments such as high operating costs due to inflation, major changes brought about in the regulatory framework must also be kept in mind before making any decision related to them. 

About the Authors

Vibhore Chaturvedi is a Senior Associate at Fox Mandal & Associates, Advocates & Solicitors, Mumbai and an Adjunct Advisor, IJPIEL

Ananya Vatsa is a 4th-year law student at the Maharashtra National Law University (MNLU), Nagpur and an Associate Editor at IJPIEL.

Editorial Team 

Endnotes

[1] https://sdgs.un.org/goals

[2] https://www.livemint.com/industry/infrastructure/invits-the-next-big-infra-story-11597814096232.html

[3] https://www.nseindia.com/products-services/infrastructure-investment-trusts-invit

[4] https://www.sebi.gov.in/sebi_data/meetingfiles/jan-2018/1515989492067_1.pdf

[5] https://www.sebi.gov.in/legal/circulars/apr-2019/guidelines-for-determination-of-bidding-allotment-and-trading-lot-size-for-real-estate-investment-trusts-reits-and-infrastructure-investment-trusts-invits-_42772.html

[6] https://www.ibbi.gov.in/uploads/resources/Securities_or_Financial_Assets.pdf

[7] https://www.sebi.gov.in/legal/circulars/sep-2020/amendments-to-guidelines-for-preferential-issue-and-institutional-placement-of-units-by-a-listed-invit_47697.html

[8] https://www.sebi.gov.in/legal/circulars/mar-2020/relaxation-from-compliance-to-reits-and-invits-due-to-the-covid-19-virus-pandemic_46398.html

[9] https://www.livemint.com/industry/infrastructure/invits-the-next-big-infra-story-11597814096232.html

[10] https://www.sterlitepower.com/news/detail/harsh-shah-ceo-indigrid-talks-detail-about-invit-and-how-it-works

[11] Id.

[12] Id.

[13] https://indianexpress.com/article/explained/explained-how-nhai-plans-to-monetise-its-highways-through-invits-6605500/

[14] Id.

[15]https://www.sebi.gov.in/sebi_data/meetingfiles/mar-2019/1553756389858_1.pdf