Nitan Chhatwal, MD, Shrem InvIT
At a time when most investors are figuring out the best places to invest in, when rates of most investment avenues have plummeted, an answer crops up in the form of InvITs. These too-big-to-fail banks of the financial world are tailored to the infrastructure sector’s unique needs. What’s more, it allows them to become a part of the rapid nation-building process that India finds itself in now.
What are InvITs?
Infrastructure Investment Trust (InvITs) is a platform that enables investment into operational infrastructure assets with a robust regulatory framework provided by the SEBI. It was started by the government with the goal of promoting and providing extra funding for infrastructure investments in India and giving unit holders an opportunity to make a pooled investment in large infrastructure projects.
Indian investors have been active in this space; these include mutual funds, insurance companies, family wealth offices, and ultra-high net worth individuals (HNIs).
InvITs are a new asset class that provides a consistent long-term return in the range of 9-10% while avoiding the risk of equity. InvITs involve a dividend income, which is paid either quarterly or bi-annually on a per-unit basis, and capital gains, where the price of InvIT units is subject to change based on its performance. Similar to dividends, the interest pay-outs can be made by an InvIT on a quarterly or bi-annual basis. The amount paid out as interest to unit holders is calculated after deduction of withholding tax by the InvIT.
Annuity InvITs predominantly have predetermined annuity income for which they largely depend on hybrid annuity model (HAM) projects of NHAI. Shrem InvIT is an example of Annuity InvIT. Under the HAM, 40% of the project cost is paid by the Government or concessioning authority as construction support or grant to the private developer, and the balance 60% is to be arranged by the successful bidder during the construction period. The concessionaire is paid back the amount of 60% along with interest and O&M payment in the form of annuities during the operation period.
While the concessionaire is responsible for the operation and maintenance during the concession period, the traffic risk is taken by the project concessioning authority. Tolling rights during the O&M period are vested with the concessioning authority after the declaration of commercial operation of the developed section.
Investing options in InvITs
InvITs are classified into 5 categories based on the type of infrastructure in which they operate:
- Energy: (e.g. power generation and distribution)
- Transport & Logistics (e.g. operating highways and other toll roads) Communications (e.g. optical fibre networks and telecom towers)
- Social and Commercial Infrastructure (e.g. parks)
- Water and Sanitation (e.g. irrigation networks).
- privately-held InvITs
- public-listed InvITs
- private-listed InvITs.
With alternatives in InvITs from private financing, public and private equity, and direct investment, they form a class of asset-intensive investments and create predictable and steady cash flows over time, making them a good fit for insurers’ liabilities-driven investment strategies. While they have low liquidity and regulatory risks, InvIT units can still be purchased and sold on the stock market.
InvITs cannot invest more than 10% of their assets in under-construction projects. This lowers the risk for investors as this reduces the biggest risk associated with the infrastructure sector i.e., delay in completion due to lack of regulatory approvals, and financial closure. Also, all the revenues of the InvITs are received in an Escrow account, and till pay-out to the unit holder, it moves from one escrow to another.
All revenue received by InvIT from SPVs (Special Purpose Vehicles) in the form of dividends, interest, and capital returns, is not taxable thanks to its pass-through structure. With Tax on Interest Income, any interest you get from an InvIT is fully taxable at the marginal rate of taxation, while Tax on Dividend is fully exempted if the SPVs under InvIT have not availed concessional rate of tax under the new regime. Tax on Capital Gains applies solely when you sell your InvITs units. It thus breaks off as a safe form of investment that also has tax dividends, especially for big businesses and corporates that rake in all-encompassing profits, a taxed component of which is payable to the government.
What the future holds?
The current Indian economy has a sizeable dependence on infrastructure as a vehicle of growth. Infrastructure-based sectors such as roads, highways, and ports, along with the power and real estate sectors have witnessed a growing demand for capital in recent times. As a result, Infrastructure Investment Trusts (InvITs) have attained importance in furthering the economy’s infrastructure needs. The Government of India launched InvITs to bring long-term yield capital into the country and to increase private participation in infrastructure development.