Infrastructure investment trusts (InvITs) as an investment platform have come a long way. From being a non-starter, the product has gained a lot of popularity among long-term investors. Though retail participation is low, the product has received significant institutional backing. At present, there are six InvITs that have raised over Rs 276 billion from investors, while a seventh entity is at an advanced stage of raising Rs 252 billion, according to ICRA. The total value of assets under these seven InvITs is estimated at Rs 1.3 trillion. In terms of assets, three InvITs are in the road sector, and one each in the power transmission, gas transmission and telecom tower segments. Renewable companies are exploring this option actively as well.
Route for public asset monetisation
It has been recognised by the government that once infrastructure assets have been created, they need to be bid out to private entities for efficient operation and maintenance. In this context, asset monetisation not only allows investors/private players to bid for yield-generating assets, but also allows the government to recycle capital that can then be used for investment in new infrastructure projects. In addition, this financing option allows unlocking of the value of underutilised public assets and also helps pare debt of public sector enterprises. While private players have already started tapping this route for deleveraging their balance sheets, the government is also considering the same for raising funds. Power Grid Corporation of India Limited (Powergrid) and the National Highways Authority of India (NHAI) are among the first government entities with plans to launch InvITs. While Powergrid plans to raise Rs 70 billion, NHAI will soon come out with its Rs 50 billion InvIT.
High investor interest
The strong and consistent regulatory and taxation framework for InvITs has made the investment vehicle an attractive proposition for investors. Companies are opting for launching private unlisted InvITs over stock market listings. This is because of the greater flexibility and relaxations for sponsors in the case of the former. Listed InvITs are required to maintain a maximum leverage ratio of 49 per cent, which can be increased to 70 per cent, subject to a track record of six continuous distributions to unit holders (post listing); have AAA rating; meet additional disclosure and compliance requirements; etc. However, the 49 per cent leverage requirement is not applicable to private unlisted InvITs. Due to these factors, private unlisted InvITs are more popular among sponsors and investors.
Income tax exemption for investments by sovereign wealth funds and pension funds in InvITs has been an encouraging move. Brookfield, GIC, the Abu Dhabi Investment Authority (ADIA) and CPP Investments are among the marquee investors in Indian InvITs. The Digital Fibre Infrastructure Trust, formed to monetise Reliance Industries Limited’s fibre optic network assets, most recently raised $1 billion from Saudi Arabia’s Public Investment Fund and ADIA. Besides, Tata Power, Infrastructure Leasing & Financial Services Limited and Cube Highways and Infrastructure have unveiled plans to issue InvITs to monetise their assets. Renewable energy has been one of the highly favoured sectors for investors. Brookfield, Dutch pension fund APG, Caisse de dépôt et placement du Québec, KKR, etc. are exploring investment opportunities in this space through the InvIT route.
The Covid-19 pandemic has jolted the entire economy and the impact on the transport sector has been huge. The uncertainty in traffic growth and toll collections has made investors cautious towards the road sector in the short run. The IRB InvIT Fund reported a 44 per cent decline in its net profit to Rs 239 million for the quarter ended June 2020 on the back of lower toll collections due to the coronavirus-induced lockdown. The InvIT had reported a net profit of Rs 428 million in the corresponding quarter of 2019-20. NHAI’s InvIT too has been delayed due to lukewarm investor demand for toll road assets. However, with long-term fundamentals intact, InvITs are creating quite a stir among investors.
Key recommendations
With InvITs emerging as an important source of financing, the task force for the National Infrastructure Pipeline has made suggestions for improving investor participation in these instruments. As per the task force’s recommendations, the Insurance Regulatory and Development Authority of India should revisit the prescribed cap of 5 per cent for insurance companies’ investment in a single InvIT. The authority should come out with clear guidelines allowing insurance companies to invest in debt securities issued by InvITs, in line with traditional companies. Similarly, the Pension Fund Regulatory and Development Authority mandates a minimum credit rating of AA for the sponsor of an InvIT in order to allow participation by pension funds. As InvITs are independent of their sponsors, the rating threshold should be made applicable only to InvITs and not the sponsors.
Outlook and opportunities
The country offers a lucrative pipeline of operational assets including roads/highways, railway tracks, airports and transmission lines. Telecom towers, renewable energy assets, fibre optic assets, data centres, and warehouses and logistics parks have huge potential for monetisation through InvITs and real estate investment trusts (REITs). According to ICRA, over the next four to five years, InvITs have the potential to acquire infrastructure assets worth Rs 4 trillion, of which Rs 1.5 trillion could come from the unit capital raised from investors.
The enabling framework for InvITs has been a huge positive for boosting investor sentiment. The exemption of the dividend distribution tax (DDT) for unitholders of InvITs has brought much-needed cheer. It has encouraged and incentivised InvITs by avoiding multiple levels of taxation. The leverage restriction was a dampener in the past. With the relaxation in the leverage ratio, acquisition of operational assets through InvITs will gain traction. While uncertainty due to the pandemic will delay InvITs in the pipeline, the long-term outlook for the product is sanguine as it is one of the most efficient financing options available to the government. Investors are also actively considering this route as there is more flexibility in participating in an existing InvIT.