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The infrastructure investment trust (InvIT) pools money from the investors and invests in infrastructure assets like roads, pipelines, transmission lines, bridges, power plants, etc. These infrastructure assets generate revenues which are distributed back to the unitholders.
InvITs help the infrastructure developers to reuse the capital that is held up in long-term projects. Other than equity the infrastructure investment trusts help in generating debt from pension funds, sovereign wealth funds, and insurance companies that have a long investment horizon and are looking for an investment opportunity that is safe with a higher yield.
InvIT has features of both equity and debt. The business model provides stable low-risk cash flow like debt but there is also a growth opportunity like equity as the returns are not fixed and the unit price can change.
InvITs must make 80% of their investment in completed and revenue-generating projects to mitigate the risk of the under-construction projects. The remaining 20% can be invested in under-construction projects or securities of infrastructure companies. 90% of the net distributable cash flow of invites is distributed to the investors as dividends on a bi-annual basis.
Structure of Infrastructure Investment Trust (InvIT):-
InvIT is established as a trust, registered with SEBI, and follows a 3-tier management structure like a mutual fund.
A sponsor can be a body corporate, company, or promoter with a net worth of at least Rs. 100 crore. The sponsor must hold at least 15% of the InvIT with a minimum lock-in period of 3 years after the formation of trust. An InvIT can have a maximum of 3 sponsors as per SEBI. The responsibility of the sponsor is to set up an infrastructure investment trust and appoint a trustee.
The trustee should have a proven track record of providing trustee services. Once the trustee is appointed they take control over the assets of the infrastructure investment trust. The responsibilities of a trustee include looking after the interest of the unitholders, ensuring timely distribution of dividends, and monitoring the activities of InvIT managers.
The next step is the appointment of managers by the trustee and two managers are appointed; the investment manager and the project manager.
The investment manager is responsible for ensuring that the existing investments of the InvIT are generating good returns. Other than this they are also responsible for making investment decisions to help the growth of InvIT assets.
The responsibilities of a project manager include the smooth operations of the completed projects and timely delivery of the projects under construction.
After the managers are appointed, the InvIT can be registered and listed on the stock exchanges to raise money by selling its units to the public. The InvIT may even raise money from private investors if it decides not to get listed.
Who regulates Infrastructure Investment Trusts (InvITs)?
InvITs are regulated by the Securities and Exchange Board of India (SEBI) and governed by SEBI(Infrastructure Investment Trusts) (Amendment) Regulations, 2016.
There are 15 InvITs in India that are SEBI registered and their names are-
1) Data infrastructure trust.
2) Digital fiber infrastructure trust.
3) India grid trust.
4) India infrastructure trust.
5) Indian highway concessions trust.
6) IndInfravit trust.
7) IRB infrastructure developers limited.
8) IRB InvIT fund.
9) MEP infrastructure investment trust.
10) National highways infra trust.
11) Oriental InfraTrust.
12) PowerGrid infrastructure investment trust.
13) Roadstar infra investment trust.
14) Shrem Invit.
15) Virescent renewable energy trust.
What is the minimum amount a person can invest in InvIT?
SEBI has lowered the minimum application value for InvIT in the range of Rs 10,000 to Rs 15,000, almost equal to that for equity IPOs. The minimum amount to be invested in InvIT earlier was Rs 1 lakh. The lot size has also been reduced from 200 to 1 unit on the stock exchanges. For the unlisted InvITs, SEBI has introduced the minimum unit holders’ requirement, which should be at least 5 investors other than sponsors, and they should hold 25% of the unit capital of InvIT. SEBI has attempted to create an environment to improve the liquidity in InvITs so that a greater number of people can invest in them.
Differences between REITs and InvITs-
The returns on bank fixed deposits are very low now and it serves investors better to invest in REITs and InvITs. But before that, the investor should be aware of differences between the two-
1) Infrastructure investment trusts (InvITs) pool money from investors to invest in infrastructure assets like roads, highways, pipelines, and power plants while Real estate investment trusts(REITs) invest in income-generating real estate properties like commercial buildings, malls, healthcare centers, etc.
2) Income Stability
REITs are more stable as 80% of their investments are in income-generating assets with rental contracts that ensure a steady income. The cash flow of InvITs depends on a number of factors that can affect their capacity utilization and the scalability of tariffs can have an effect on sustainable growth.
The growth prospects of InvITs depend on the success of the acquisition of assets. It depends on how a company acquires assets via the bidding process. The growth of REITs depends on the redevelopment of their existing assets, acquisition of new assets, or the start of new construction.
The liquidity of REITs is better as they have a lower unit price as compared to InvITs. This makes it a good option for small investors.
The publicly-traded REITs have interest rate risk. When the interest rates rise, people sell REITs and go to safer products. InvITs are prone to political or regulatory risks. The risk of failure of the project gets transferred to the investors.
Types of InvITs-
The infrastructure investment trusts (InvITs) can be of 5 types depending on the infrastructure they operate-
- Transport and logistics like highways and toll roads.
- Energy like power generation and distribution.
- Water and sanitation.
- Communications like optical fibre.
- Social and commercial infrastructure development like the parks.
- Pros and Cons of investing in InvITs
InvITs offer investors a way to diversify their investment portfolios. This reduces the volatility of the overall portfolio and generates steady returns over the long-term time horizon.
2) Steady Income-
The InvITs distribute 90% of their earnings to the investors which are good for investors who require a steady flow of income from their investments.
3) Low Risk-
InvITs invest 80% of their funds in revenue-generating projects and 10% in under-construction projects. This way the risk for the investors is reduced.
4) Professional Management-
The InvITs are managed by professional managers who are well versed in this field. This reduces the hassles for the investors and ensures the optimum performance of the project.
5) Good corporate governance-
InvITs are regulated by SEBI. They have the trustees and managers for their functioning. Apart from this, there are strict disclosure policies, mandatory rating requirements, and valuation by independent valuers.
Units of the InvITs are traded on the stock exchanges like common stocks. Even a small investor can invest in them, with the lot size reduction to a minimum of 1 unit.
1) Operational Risk-
There are some operational risks associated with InvITs. This can be volume or traffic risks, delays in collection, and tariff risks. Investors should study the management team before investing in InvITs. A change in tariff and usage can lead to an increase or decrease in revenues.
2) Regulatory Risk-
The regulations in the infrastructure sector are still evolving in India. Any change in regulation can affect the projects. Tariffs can also change due to government regulations.
3) Asset Risk-
The infrastructure projects have a long gestation period and there could be a delay in the process of generating returns which could have an effect on the cash flow and change the profit projections.
4) Low Liquidity-
The number of InvIT buyers and sellers on the stock exchanges is low. This may make it difficult to sell at the desired price in case of an emergency when you require the money urgently.
Taxation of InvITs-
An investor should be aware of the taxation of InvITs which are on the dividend received and the capital gains. The taxation on dividend and interest income is according to the tax slab. In the income tax returns, it has to be filed under the head “Income from other sources.” Under the highest tax bracket, a person has to pay 30% tax on dividends or interest received.
The capital gains on InvITs accrue when you sell the units. If you sell the units after holding them for more than 3 years they come under Long Term Capital Gains (LTCG) which is taxed at 10% exceeding Rs 1 lakh. If you sell the units before 3 years, Short Term Capital Gains (STCG) is applicable and is taxed at 15% on the sale of InvIT units.
How to invest in InvITs?
An investment in InvITs, the units of which are listed on the stock exchanges can be done just like the equities. A Demat account is a requirement and you can purchase the units through the stock markets. Mutual funds also invest in InvITs but are currently allowed to invest up to 5% of their assets in alternative investment funds like InvITs.
Infrastructure investment trust (InvIT) as an investment instrument is beneficial for all parties concerned like the developers, lenders, government, and investors. Today the interest rate on fixed deposits is very low. Investment advisors are advising their clients to invest in InvITs as these can generate a return of 8-9% on an annualized basis. But the investment horizon should be above three years as they are exposed to short-term price fluctuations due to changes in interest rates. An investor should do a detailed study before investing in InvIT which would give him confidence in his investment.