Infrastructure investment trusts (InvITs) have gained momentum in the recent past. The product is being seen as a potential source for infrastructure financing for developers and a lucrative investment avenue by long-term investors. With the ability to create a virtuous cycle of infrastructure development, the product has evolved over time. Supportive regulatory measures and increasing investor participation have incentivised players to launch InvITs. Income tax exemption for investments by sovereign wealth funds and pension funds in InvITs has also been an encouraging move. Brookfield, GIC, the Abu Dhabi Investment Authority and CPP Investments are among the marquee investors in Indian InvITs.
Unlike InvITs, infrastructure debt funds (IDFs) have failed to create a buzz in the country’s infrastructure financing space. With low credit growth, banks are retaining good operational projects at fine margins. Moreover, banks are unwilling to let go of these assets as they had assumed the risk during construction. There has been increasing competition in the refinancing market from sources such as bonds and InvITs. On the liabilities side, limited depth and volatility in debt capital markets pose challenges in raising long-term liabilities (over five years) in a cost-effective manner.
Current market size
Currently, there are six InvITs, of which two are publicly listed while the remaining four are private InvITs. As per ICRA, in the next five years, fundraising through InvITs is estimated to be Rs 2 trillion. Much would depend on the regulatory and tax regime, and uncertainty due to Covid-19 may delay InvITs in the pipeline. Tata Power, Infrastructure Leasing & Financial Services Limited (IL&FS) and Cube Highways and Infrastructure have plans to form InvITs. Rising investor interest in the product has also nudged the government to tap this route to raise capital. The InvIT launched by the National Highways Authority of India and Power Grid Corporation of India Limited will be the most watched, given the size and track record of their projects.
There are two types of IDFs – the first under the non-banking financial company (NBFC) format known as IDF-NBFC and the other under the mutual fund (MF) format known as IDF-MF. IDF-NBFCs have scaled up better than IDF-MFs. At present, there are four IDF-NBFCs which have accumulated assets worth Rs 300 billion in the past five to six years. This figure should have been close to Rs 500 billion, but IDF-NBFCs have been facing headwinds after the IL&FS default and the crisis faced by the NBFC industry. A silver lining in the IDF-NBFC market is the low level of non-performing assets that has helped the market sail through difficult times faced in the past year. Investments from provident funds, pension funds, insurance companies and banks have been increasing in IDF-NBFCs, albeit slowly, thus demonstrating confidence in the product.
Challenges and recommendations
Despite the advantages of InvITs, the industry has highlighted a few concerns requiring immediate attention. During the ongoing Covid-19 pandemic, some special purpose vehicles (SPVs) have been unable to meet their debt obligations. Under Section 2(22)E of the Income Tax [IT] Act, when a cash-surplus SPV on-lends money to a cash-deficit SPV of the same InvIT, this is characterised as a deemed dividend and attracts tax. Thus, bringing parity for listed trusts with listed companies under the IT Act would help resolve the issue.
Another issue is that listed InvITs are being traded as equities and therefore securities transaction tax is being paid as is the case with equity trading. The period of holding is three years to get long-term capital gains benefit. However, the capital gains treatment is similar to that of a debt listing. This anomaly needs to be removed and there should not be differential tax treatment for listed InvITs.
The carry forward of losses under Section 79 of the IT Act also needs to be relooked at. If an InvIT is acquiring an SPV, all the carried forward losses incurred by the SPV till the time of acquisition cannot be carried forward to the new entity. This is contrary to the case of listed companies, where if one listed company acquires another, the losses are allowed to be carried forward. As an InvIT is not viewed as a listed company, the losses of the SPV incurred till the time of acquisition have to be written off. These losses are not entitled to be carried forward for being set off.
There lies significant opportunity for InvITs given the huge infrastructure investment envisaged under the National Infrastructure Pipeline. The country offers a lucrative pipeline of operational assets such as roads/highways, railway tracks, airports and transmission lines. Telecom towers, renewable energy assets, fibre optic assets, data centres, and warehouses and logistics parks carry huge potential for monetisation through InvITs and real estate investment trusts.
Outlook
IDF-NBFCs are likely to show robust growth in terms of both business volumes and profits in 2020-21 with delinquencies contained in a market where other NBFCs are facing high credit costs and eroding profitability. Thus, the product has a promising outlook in the infrastructure financing space. With regard to InvITs, the product has made significant progress in the past few years and is expected to continue doing so in the future. A healthy line-up of completed projects increases the role and importance of refinancing instruments such as IDFs and InvITs.