After a slow start, infrastructure investment trusts (InvITs) are finally making inroads in the infrastructure financing space. The past 12-18 months have been quite eventful in this regard. A slew of regulatory measures have been introduced to improve the InvIT framework. As a result, a number of investors have flocked towards the investment vehicle. Interest has been greater from the international investor community that is actively chasing assets with low risk and stable yields. Domestic investors are also warming up to the instrument as notable infrastructure players are taking this route to keep the capital cycle in motion. The momentum, it is understood, has just begun.
In India, the InvITs was introduced in 2014 when the Securities and Exchange Board of India (SEBI) released guidelines governing the hybrid investment vehicle. While the novelty of the instrument did catch investors’ fancy, most of them resorted to a wait-and-watch strategy. After two-three years of inertia, the inflection point was reached in 2017, when two InvITs were launched, one each by IRB Infrastructure Developers and Sterlite Power Ventures. Thereafter, a number of these instruments have come into existence. Infrastructure companies in sectors such as roads, power, gas, renewables and telecom have taken the InvITs route to churn capital from their operational projects towards those that are under construction. This has aided players during the current period that is marked by constrained debt and equity flow, especially towards the infrastructure space.
The euphoria with respect to InVITs as an asset class is far from evaporating, as a number of such vehicles are in the pipeline. These are at different stages of formalisation and are expected to be launched in the near future.
Regulations have been the key architect of InvITs’ success so far. Over the past year, a number of measures have been introduced by SEBI. This was complemented by recent changes introduced by the Reserve Bank of India (RBI). With the rationale of attracting more private and institutional capital towards infrastructure development, the regulator and the apex bank seem to be hitting the mark, at least for now.
Recently, in October 2019, a much-awaited reform was introduced, with RBI permitting banks to extend credit to InvITs (subject to tighter scrutiny), paving the way for infrastructure players to monetise their assets through this route. The move has expanded the market for InvITs to raise debt from. Prior to this reform, debt was being availed at the special purpose vehicle level, causing operational complexities and higher cost of credit.
Another source of debt that InvITs can tap is the foreign portfolio investors (FPIs). Under Union Budget 2019-20, the finance ministry proposed permitting FPIs to subscribe to listed debt securities of InvITs.
- Private placement preferred over public listing: In the InvITs operational so far, there is a clear preference towards privately placed structures. Only two InvITs have been publicly listed, and the retail interest towards them is not very encouraging as the expected high yields are not realised. This, along with a cautious approach by domestic institutional investors, has impacted the demand for publicly listed InvITs.
- Greater enthusiasm by foreign investors: So far, funds to the tune of over $4 billion have been raised in total by the active InvITs. Global heavyweight investors such as Canada Pension Plan Investment Board (CPPIB), KKR, Allianz Capital, Ontario Municipal Employees Retirement System (another Canadian pension fund), GIC, Brookfield and the Asian Infrastructure Investment Bank have invested in InvITs so far.
- A major reason for greater participation by international players is their vast exposure to similar vehicles in other global markets that gives them an edge over their domestic counterparts with little experience in this area. Another problem being faced by domestic investors pertains to categorisation of these instruments as equity or debt in their books.
- Performance: The stocks of listed InvITs have been underperforming on the bourses, an indication that these instruments may be “losing their sheen”. However, there is a crucial caveat to this. Since these are hybrid instruments (and more close to being debt than equity), a correct assessment of their performance calls for consideration of other returns too, that is, the dividend payouts (measured in dividend per unit), interest and buybacks. Taking these into account, the publicly listed InvITs are returning fair yields and are highly rated with a stable outlook. That said, the Larsen & Toubro-backed InvIT is returning higher yields than the listed ones.
Bright days ahead
According to Crisil, in the coming five years, valuation of assets under InvITs is expected to grow fivefold to Rs 2 trillion (India’s defence budget is about Rs 3 trillion). While the investment vehicle holds significant potential, a lot hinges on investors’ perception of it. InvITs, being a hybrid of debt and equity, face misplaced expectations – investors expected a higher return. However, the final return should be evaluated through dividends, interest and buybacks. Extensive investor education in this regard is necessary for these instruments to attract the right investors, especially from the domestic market.
InvITs have performed well in markets such as the US, Japan, Singapore and the UK, and effective learning can be drawn from these markets. Sectors such as airports, ports and city gas distribution hold significant potential with regard to greater penetration of this asset class.
While SEBI is playing its part well with regard to easing the regulatory framework for InvITs, this must be matched by steps from regulating entities of investor classes that are yet to open up to this instrument. The Employees’ Provident Fund Organisation, the Insurance Regulatory and Development Authority of India, and the Pension Fund Regulatory and Development Authority must consider tweaking guidelines to allow entities (regulated by them) to participate more in the InvIT space. Tax-related concerns may also be addressed to enhance retail participation in these vehicles.
In sum, InvITs are doing well even as these issues exist. Once the issues are ironed out, this hybrid vehicle can shoulder far greater weight of infrastructure financing in the country in the times ahead. w