The journey of infrastructure investment trusts (InvITs) has been a rewarding one. In a span of two years, the country has achieved what had been under discussion for two decades – to have long-term capital enter infrastructure assets and make them a yield play. InvITs were launched with the aim of separating assets with development risks (that are high) from those with operating risks (that are low). The instrument carries debt-like risk with the possibility of giving equity-like returns. The year 2019 is an inflection point for the growth of InvITs in the country. While the market seems to be bullish around the product, taxation-related clarity and investor education will spur activity in this space.
The Securities and Exchange Board of India (SEBI) has done well in outlining a robust framework for InvITs. In April 2019, the market regulator reduced the minimum subscription requirement and defined trading lots, both of which are crucial steps for the development of the capital market. The amendments are aimed at providing flexibility to issuers in terms of fundraising and increasing access to InvITs by investors.
Further, the leverage limit for InvITs has been increased from the current 49 per cent to 70 per cent. The regulation provides the flexibility to leverage additional capital of up to 70 per cent for the assets. With the higher leverage, the cushion for debt servicing will reduce and hence the stability of cash flows will become very critical to maintain a strong credit profile. In the case of toll roads, due to uncertainty of traffic, cash flows could get impacted, thereby making higher leverage a difficult proposition. In contrast, hybrid annuity model-based projects can go for higher leverage due to lower risks.
Earlier, there were some regulatory hurdles during listing of InvITs such as lack of coordination among and alignment of different regulators, which restricted participation of some investor classes. However, in the past couple of months, the instrument has generated a lot of interest among large global investors. This speaks volumes about the strong regulatory framework, potential of the instrument and long-term opportunity for investors to generate yields. While the regulations are evolving, investors have shown confidence due to the availability of a large portfolio of assets across sectors.
Experience so far
When the first two InvITs – the IRB InvIT and Sterlite’s IndiGrid – were launched, the lot size was higher, and this limited trading on the retail side. The product is still in the price discovery phase. While 11 InvITs are registered with SEBI, only two have been publicly listed so far. The initial experience with the two listed InvITs puts greater onus on the sponsors and investment bankers to be educated about the product for ensuring fair price discovery. Although these InvITs have not yielded the desired returns to investors to begin with, but as distribution to unit holders increases with the addition of operational assets, the product is expected to stabilise.
IndiGrid, the InvIT sponsored by Sterlite Power Grid Ventures Limited, is based on high quality transmission assets with no tariff and volume risks. It was launched in 2017. Recently, IndiGrid was able to raise capital from KKR and GIC via a preferential issue. The number of investors has increased from 2,000 at the time of listing to 3,500 at present. Till date, IndiGrid has distributed dividends to the tune of Rs 6 billion to its investors.
The investor base has also changed over the past two years. At present, foreign institutional investors (FIIs) hold a 50-60 per cent share while retail investors hold 12 per cent. Domestic investors have not been active participants in the InvIT space due to regulatory constraints. For instance, the Pension Fund Regulatory and Development Authority has allowed pension funds to invest in InvITs, subject to the sponsor having a minimum AA rating. Such regulations inhibit participation of pension funds, which are actually well suited to provide patient capital to infrastructure projects. With regard to mutual funds, the question that needs to be asked is, “Are they the right investors for InvITs?” Proponents say that mutual funds bring in liquidity while opponents believe that they are short term in nature. Therefore, the debate continues. In the long run, however, there could be a possibility of having an InvIT-focused mutual fund, which can understand the business risks associated with InvITs and can then invest on behalf of retail investors.
Meanwhile, InvITs have generated a lot of interest among retail investors. With the recent reduction in the minimum trading lot and with brokers getting more educated, the involvement of this investor class is bound to increase going forward.
The two listed InvITs, along with privately placed L&T IndInfravit, have seen anchor investment of 25-55 per cent. Anchor investors have thus played a crucial role in building confidence of other investor classes around the product.
Globally, banks finance infrastructure projects only till the construction phase. However, in India, the majority of infrastructure financing is undertaken by commercial banks. The scenario is changing for operational assets with long-term investors willing to acquire them either directly or through platform investments such as InvITs. Thus, InvITs have opened the doors for institutional investors to substitute bank lending for operating assets.
Besides road and transmission assets, airports too can take the InvIT route for funding. The country’s airport sector is in expansion mode. A decade later, there could be InvITs for this sector once airports have reached peak operating capacity. Another sector which is seeing action in the InvIT space is renewable energy. Piramal Enterprises recently signed an agreement with the Canada Pension Plan Investment Board to co-sponsor India’s first renewable energy-focused InvIT. Going forward, more InvITs are expected to come up in this sector.
Public and private InvITs will coexist for some time. Although private InvITs are crucial in building investor confidence, public listing of the product is the way forward in the longer term (10-20 years) to garner more domestic capital.
The success of this investment vehicle depends on governance. Approval of unit holders forms a core part of governance. As long as the governance is sound, quality of assets good and scale achieved in terms of portfolio size, investors will continue to actively invest in InvITs. Also, to increase retail-level participation, it is essential to create awareness about the instrument. On the regulatory front, tax simplicity and clarity at every stage – special purpose vehicle, holding company, unit holders – is the need of the hour for greater institutional investment. Given the positive sentiment around the product, especially in the past two years, the next five years will witness a boom in the InvIT space.
Based on a panel discussion among Parag Parikh, Group Head, Project Finance and Structured Finance, GMR Group; and Harsh Shah, Chief Executive Officer, IndiGrid, at a recent India Infrastructure conference