Monetising Assets

The way forward for InvITs

Infrastructure investment trusts (InvITs) are likely to be the next big infrastructure story in India. With an annuity-like business model, InvITs have managed to navigate the market uncertainty, even in Covid times. Since their conceptualisation in 2015, InvITs have had a good journey. Over 10 InvITs have been launched and many more are in the offing. Roads is the most popular sector with three InvITs, followed by the power transmission, gas and telecom sectors with one InvIT each. Tata Power has also announced plans to launch the first renewables InvIT, while IL&FS has received SEBI’s approval for its road InvIT. Government-sponsored InvITs by NHAI and Power Grid are going to be the most watched this year, given the size and track record of projects.

Recently, the government has allowed debt financing through foreign portfolio investors and has exempted a dividend payment to InvITs from tax deducted at source. With an evolving regulatory framework and clear policies, it is expected that InvITs will be considered a preferred route of infrastructure investment for long-term investors. The timely redressal of unresolved issues with respect to taxation, lock-in period, etc. will be an added advantage. India Infrastructure Forum recently organised a webinar on The Way Forward for InvITs to discuss specific issues and seek specific responses/solutions. The key takeaways…

Infrastructure development is the basic foundation of economic growth, quality of life and improvement. In recent times, India has witnessed a high pace of infrastructure development. From railways to highways, new records are being created and partners as well as suppliers are playing a major role in this field.

Recognising the importance of infrastructure development for the overall development of the country and the continuous need of capital to finance such infrastructure, SEBI has provided a mechanism for freeing up developers’ capital and monetising infrastructure assets through InvITs. InvITs have helped raise Rs 22,700 billion through asset monetisation and Rs 220 billion is expected to be raised in the near future.

Roads is the most popular sector with three InvITs (IRB InvIT, IndInfravit and Oriental InfraTrust), followed by one each in power transmission (IndiGrid), gas (Pipeline Infrastructure) and telecom (Tower Infrastructure Trust). InvITs have received significant regulatory attention in the past few years. The year 2019 was an inflection point in InvITs’ growth story, with the release of guidelines on bidding allotment and trading lot size, and the grant of permission for bank lending. The trend continued in 2020 with the issuance of guidelines/amendments with respect to the preferential issue of listed InvITs, trading of units on the stock exchanges and the rights issue of unlisted InvITs.

Issues and challenges

Access to credit capital through bank loans and debt securities issued by InvITs has been a long-standing issue. Considering the importance of debt capital and a healthy capital structure, SEBI has enabled InvITs to borrow even through the issue and security. However, there have been concerns raised by sectoral regulators. SEBI has been engaging with them to facilitate access to debt capital. The unlisted InvITs and reduction in the trading lot are some of the other concerns that need to be raised.

Initially, SEBI brought down the trading lot size for InvITs from Rs 500,000 to Rs 100,000, which led to a significant increase in liquidity. IndiGrid emphasised that retail investors feel Rs 100,000 is still on the higher end as it is looked at as a quasi-equity instrument. In addition, there are operational issues with the trading lot size not being equal to one unit. In response, the Ministry of Finance stated that InvIT is a long-term investment and Rs 100,000 is not a big amount for someone interested in infrastructure financing and there are not frequent public issues of InvITs. IndiGrid also mentioned that in case of right issues of InvITs and REITs, many investors do not get a chance to participate because the lot size is more than what they have. It leads to a significant amount of fractional entitlement.

Besides, IndiGrid stated that initially there was a benefit in keeping the trading lot size since it was a new instrument and fewer disclosures were available. Now, it makes merit to bring it at par with other equity instruments so that the liquidity increases. When the liquidity is lower even domestic institutions do not wish to participate. Unless the platform is liquid, investors will refrain from participating. Moreover, no global indices or domestic include InvITs and REITs as a part of their portfolio, which refrains international passive capital from coming into infrastructure. Pipeline Infrastructure Limited also echoed the same opinion and made the trading lot size equal to REITs. Besides, IRDAI pointed out that the reduction in market lot size is currently a major concern. If it is reduced, retail investors can move into the picture.

Further, liquidating the secondary market is a key issue due to which insurance companies are not able to participate. Otherwise, another exit route needs to be provided. An investment manager from the same sponsor is yet another concern.

Another key challenge pointed by PFRDA was that various pension funds (PFs) are not willing to invest in InvITs due to the following reasons: InvITs are a complex form of investment and PFs are prone to invest in traditional forms such as equity, debt and bonds; lack of liquidity; low trading volume; project appraisal independently required to be priced before investing. Another challenge is that InvITs are not provided in debt security and only allowed in units. Mandating a sponsor rating is yet another major concern.

Besides, ICICI Bank emphasised that traditional bank lending has been favoured because they would remain forever. However, there is no guarantee and listed/public InvITs are positioned as low leverage, whereas private InvITs have no such regulations regarding leverage. Kotak Mahindra Bank stated that banks are the key participants, but there are a lot of restrictions resulting in a slower growth of the market.

Suggestions

It was recommended that SEBI should provide a framework for unlisted InvITs to get listed. Further, IndiGrid highlighted that while SEBI did enable reduction in the trading lot size from Rs 500,000 lakh to Rs 100,000, it is still not be at par with equity, hence creating issues. Therefore, it suggested reducing the lot size for InvITs.

Besides, the IndiaInfravit Trust suggested to limit the disclosure requirement for InvITs to sponsors only. To this, SEBI replied that it works in a disclosure-based regime and hence, cannot allow the same. Investors come to know about the InvITs more through disclosures and strength of the sponsor and its associates. Therefore, for all structures, disclosures are required, not only for sponsors, but for its associates and related companies. This followed another recommendation by Virescent Infrastructure to provide issuances on unlisted InvITs by way of preferential issues.

Further, NITI Aayog raised a concern on a minimum lock-in period of three years for InvIT sponsors to which SEBI replied that an option needs to be governed through the sponsor as the ultimate purpose is about monetising its assets. Another suggestion was made to allow a self-insurance reserve-based insurance provision to have better cash flow to investors.

Besides, a concern was raised regarding the tangible security in an InvIT structure to which SBI Capital Markets replied that the key security in addition to the cash flow will be the pledge of the SPV share. Therefore, in case of a default, the lender can take control of the SPV. Even in the InvIT structure, the lenders are lending InvIT. Ultimately, an InvIT is nothing but a sum of the underlined SPVs that it typically owns. As long as the lenders have a pledge of shares of the SPVs that generate the cash flows, the lender is fully secured.

Another suggestion was expressed by the IRB InvIT Fund on reducing the holding period for the applicability of long-term capital gains tax from 36 months to 12 months and matching it with other equity products. It further requested for an amendment to the Income Tax Act in the section, where carry forward of losses is not available for acquisitions at the trust level as the definition only refers to companies and not the trust. Currently, the issue is under consideration and is in discussion with the Department of Revenue.

Meanwhile, Bajaj Consultants requested for fixed deposit receipt amendments to FEMA and SEBI recognitions. IndiaInfravit Trust suggested removing the three-year lock-in period for the second tranche. The initial three-year lock-in is enough to ensure that the right quality of governance exists. It also requested the Ministry of Finance to allow the Infrastructure Debt Fund to participate in funding for InvITs.

ICICI Bank also suggested allowing banks to lend to REITs, to which the Ministry of Finance replied that the absence of a legal organisation to handle defaults makes it difficult to implement.

Later, SBI Capital Markets recommended giving senior lender status to banks for road assets as it would give comfort in terms of security structure.

Besides, Virescent Infrastructure suggested allowing unlisted InvITs to issue debt securities. Lastly, Kotak Mahindra Bank recommended that capital markets need to be free from restrictions as without liquidity it is very difficult to have a robust market. The pricing of these matured assets is much higher than others because of lack of liquidity. This bank also suggests that SEBI should look at unlisted InvITs as they also want to bring in high amounts, but bond routes have been completely closed off and banks and mutual funds have caps so they are not able to promote liquidity.

Action points

With respect to the changes made in the past few years on regulations and the impact on different stakeholders, SEBI has been engaging with market participants on a regular basis and taking various steps to ease fundraising and provide clarity and protection for investors’ interest. The steps include increasing the limit of leverage on InvITs from 49 per cent to around 70 per cent of the InvIT assets provided there is a separate framework for privately placed unlisted InvITs; facilitating fund raising for InvITs that have been provided to preferential issues, institutional placements, right issues and fast right issues; and providing removal of unit holding restrictions or non-sponsor investors.

Besides, IRDAI claims that insurance companies will be allowed to subscribe to the debt securities of InvITs and REITs shortly. A revised circular will be published soon. Meanwhile, PFRDA is planning to provide InvITs in debt security as well. The proposal has been sent to the legal department. Further, the compulsion of sponsor rating will be changed to InvITs/ REITs rating.

Meanwhile, banks would be looking at multiple exposures in terms of SPVs rather than a single InvIT. RBI has given a go-ahead to the banks. It plans to look at the ECB front as well as SBI bids in the future. The Ministry of Finance has already written to issue a notification for the expected timeline for regulators and central banks to enable subscription of debt securities issued by InvITs.

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