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InvITs (Infrastructure Investment Trust): A Witty Conundrum ?

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InvITs (Infrastructure Investment Trust): A Witty Conundrum ?

Infrastructure projects require on an average 2-3years to generate steady cash flows. During course of this time an Infrastructure Company has to be accountable to banks for payment of loans. InvIT (also known as ‘Investment Investment Trust’) gives the company a leeway to fulfill such debt obligations quickly. InvITs raise funds from a large number of investors and directly invest in infrastructure projects or through a special purpose vehicle. Having said so, this blog post will try to answer all the questions that intrigue curious minds. The Blog will dwell into the history and working of InvITs and serve a constructive narrative to deal with challenges.

In December 2013, SEBI had introduced the concept of Infrastructure Investment Trusts (“InvIT”) by way of a consultation paper on InvIT. Securities and Exchange Board of India (SEBI) issued draft regulations for InvITs on 17 July 2014 which were kept open for public comments till 24 July 2014.The final regulations were issued on 26 September 2014. These regulations are known as the SEBI (Infrastructure Investment Trusts) Regulations 2014 hereinafter (the “2014 Regulations”).

InvITs are trusts that manage income-generating infrastructure assets, offering investors regular yields and a liquid way to invest in infrastructure projects. InvIT is a mechanism that enables developers of infrastructure assets to monetize their assets by pooling multiple projects under a single entity (trust structure). It enables direct investment of small amounts of money from possible individual institutional investors in infrastructure to earn a small portion of the income as return.

A trust may firstly conduct an IPO issue after which it may be listed on stock exchanges. InvIT Regulations do envisage private placement, subject to certain conditions.

The minimum application size for InvIT units is Rs. 10 lakh. This minimum size aims at delivering equal treatment to domestic investors and also Foreign Portfolio Investors. According to SEBI rules, at least 90% of funds collected, after payment of expenses, taxes and external debt should vest with the investors every six months. The Short-term capital gain on sale of units is taxed at 15% whereas long-term capital gains are exempted.

The four important parties to  InvIT units issue are sponsors, investment managers, project managers and the trustee. The Sponsor sets up the InvIT and appoints the trustee; he is required to hold minimum required percentage of total units of InvIT. The Sponsor collectively holds a minimum of 25% (twenty five percent) of the total units of the InvIT on post issue basis for a period of at least 3 years from the date of listing. This minimum cap keeps the sponsor susceptible to same amount of risks to which unit holders are also required to face by virtue of their investments in InvIT. The rights and responsibilities of the sponsor have been listed under Regulation 12 of 2014 Regulations. The Trustee is required to hold assets in name of InvIT for benefit of unit holders and he is tasked to ensure investment manager makes timely payment of dividend to unit holders. The Investment manager is required to make investment decisions in relation to underlying assets. Thereafter the investment manager ensures that assets have proper legal title and the contracts entered into are legal, valid and binding. The project manager is required to undertake the operation and management of InvIT assets, further a project manager is required to ensure execution of construction projects.

On March 15 2016, SEBI came out with circular permitting Foreign Portfolio Investors (FPIs) to invest in InvITs in pursuance of Regulation 21(1) (n) of SEBI (FPI) Regulations 2014 subject to terms and conditions as may be prescribed by SEBI from time to time.[1] The SEBI went ahead and issued Guidelines for public issue of units of InvITs where it expanded requirements in public issue.[2] SEBI’s circular dated October 20 2016 laid down the disclosure requirements related to financial information being provided in offer document/memorandum for InvITs. [3] The latest circular dated November 29 2016 contains continuous disclosures and compliance by trusts relating to statement of accounts, financial information etc. [4]

IRB Infrastructure was first Infrastructure trust to have been launched by toll-road builder IRB developers. IRB InvIT constitutes six special purpose vehicles consisting of toll-road assets aggregating to 3,645 lane kilometers of highways located across the states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu. On the last day of public issue, it was oversubscribed 8.57 times. IRB’s Infrastructure investment trust closed 0.21% lower at Rs101.79 from its issue price of Rs102 on its listing day. It is currently down by 3.3% to Rs98.64 from its issue price

After IRB’s InvIT was listed on stock exchange in May 2017, IndiGrid Trust followed the trend by going ahead with its IPO issue that opened on 17 May 2017 and closed on 19 May 2017. IndiGrid became the second infrastructure trust to be listed on stock exchange following its IPO that was over-subscribed by 1.35 times. IndiGrid was expected to raise Rs 2,250 crore, but it surpassed its own estimation.  Despite surge seen in IPO, IndiGrid has failed to convince the investors as it ended the session 1.55% less than its issue price. IndiGrid got listed on BSE at its issue price Rs 100. Likewise it has tanked and NSE.[5] One of key reasons for this sharp decline may have been the Investor confidence in trust that was established on 21 October 2016. The operational risks involved in fund related to power transmission are much higher, thus it may affect the future performance of the fund.

Often touted as major investment opportunity for the opulent class of investors, InvITs have clearly failed to live upto the expectations. The results are quite visible; investors are far from convinced about implementation & results. Infrastructure sector is largely marred by delay in delivery of project which in turn results in lower returns. Further investor confidence is predominantly depended on form of interest and divided.  InvITs are subjected to the vagaries of stock exchange and any major tax reform like Goods and Service Tax can affect the Infrastructure Sector altogether.  Further Investor’s lack of control over investments and market decisions of trust add to vulnerability. If the InvITs can deal with investor’s concern over the risk return proposition, then its purpose can be better served.  The lack of clarity on tax regulations, related party transactions, operational risks serve as an impediment to the marketability of InvITs. Thus if these concerns are adhered to, the InvITs

 

[1] Investments by FPI’s in REIT’s, InvITs and corporate bonds http://www.sebi.gov.in/legal/circulars/mar-2016/investments-by-fpis-in-reits-invits-aifs-and-corporate-bonds-under-default_31893.html

[2] SEBI Guidelines for public issue of units of InvITs http://aibi.org.in/Circulars/Guidelines%20for%20public%20issue%20of%20units%20of%20InvITs%20-%20May%2011,%202016.pdf

[3] Disclosure of financial information in offer document/placement memorandum

for InvITs http://www.sebi.gov.in/legal/circulars/oct-2016/disclosure-of-financial-information-in-offer-document-placement-memorandum-for-invits_33518.html

[4] Continuous disclosures and compliances by InvITshttp://www.sebi.gov.in/legal/circulars/nov-2016/continuous-disclosures-and-compliances-by-invits_33736.html

 

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