Infrastructure Investment Trusts as Fundraiser

• 22 Sep 2020

Why in News

Recently, the National Highways Authority of India (NHAI) has decided to use Infrastructure Investment Trust(s) (InvIT) as a vehicle for mobilising funds for constructing road infrastructure.

Key Points

• Infrastructure Investment Trusts:
  
  • InvITs are instruments that work like mutual funds. They are designed to pool small sums of money from a number of investors to invest in assets that give cash flow over a period of time. Part of this cash flow would be distributed as dividend back to investors.
  • The minimum investment amount in an InvIT Initial Public Offering (IPO) is Rs 10 lakh, therefore, InvITs are suitable for high networth individuals, institutional and non-institutional investors.
    
    • InvITs are listed on exchanges just like stocks — through IPOs.
  • However, the Indian InvIT market is not yet mature and has supported the formation of 10 InvITs till date of which only two are listed.
    
    • The InvITs listed on the stock exchange are IRB InvIT Fund and India Grid Trust.
  • InvITs are regulated by the Securities and Exchange Board of India (SEBI) (Infrastructure Investment Trusts) Regulations, 2014.
• Structure of InvIT:
  
  • Like mutual funds, they have a trustee, sponsor(s), investment manager and project manager.
    
    • Trustee has the responsibility of inspecting the performance of an InvIT.
    • Sponsor(s) are promoters of the company that set up the InvIT.
    • Investment manager is entrusted with the task of supervising the assets and investments of the InvIT.
    • Project manager is responsible for the execution of the project.
• Need:
  
  • In October 2017, the Centre had launched Bharatmala Pariyojana for the development of 24,800 km of roads at a total investment of Rs. 5,35,000 crore.
  • In order to complete the projects, NHAI needs adequate funds and one of the options is to monetise the completed and operational National Highways assets and offer attractive schemes to private players to invest in construction of National Highways.
• Benefit:
  
  • At a time when private sector investment in the economy has declined, fund-raising by NHAI and spending on infrastructure will not only provide a fillip to the economy, but will also crowd-in private sector investment.
  • NHAI’s InvIT offer, which is expected to come soon, is a way for the government to tap alternative sources of financing to boost public spending in the roads and infrastructure sector.
  • An InvIT also offers the company the leeway to fulfil its debt obligations quickly.
  • InvIT holders also benefit from favourable tax norms, including exemption on dividend income and no capital gains tax if InvIT units are held for more than three years.
• Safeguards for Investors:
  
  • There are certain rules that the InvIT issuers have to follow designed to safeguard the investor.
    
    • First, the sponsor has to hold a minimum 15% of the InvIT units with a lock-in period of three years.
    • Second, InvITs have to distribute 90% of their net cash flows to investors.
    • Lastly, the InvIT is required to invest a minimum of 80% in revenue generating infra assets.

Source: IE