The Government of India is strongly focused on increasing investment in infrastructure development in the country. Towards this end, the National Infrastructure Pipeline envisages an infrastructure investment of Rs 111 trillion over a five-year period from FY2020 to FY2025. 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.
The National Monetisation Pipeline (NMP) has identified 6,800 km of operational roads to be monetised. The road sector today has 13 InvITs registered with the Securities and Exchange Board of India and two InvITs are in the pipeline. Recently, the National Highways Authority of India (NHAI) InvIT was launched, comprising a portfolio of five toll assets. CPP Investments and the Ontario Teachers’ Pension Plan bought 50 per cent units. According to reports, NHAI is now planning to raise Rs 30 billion through another InvIT, which is likely to come up for subscription in January 2022.
Recently, the central board of trustees of the Employees’ Provident Fund Organisation approved the government’s proposal to allow the retirement fund body to invest up to 5 per cent of its annual deposits in alternative investment funds including InvITs. However, this will be on a case-by-case basis and on approval from the Finance Investment and Audit Committee, and the investments will initially be restricted to public sector funds only.
In another major development, Virescent Infrastructure, a renewable energy platform sponsored by private equity major KKR, has set up the first renewable energy InvIT in India, called Virescent Renewable Energy Trust (VRET). VRET has raised Rs 4.6 billion from a group of foreign and domestic investors. Leading the transaction is the Alberta Investment Management Corporation, which is one of Canada’s largest institutional investment managers. KKR set up Virescent in October 2020 to acquire operating renewable energy assets in India.
Future plans
Power Grid Corporation of India Limited (Powergrid) is planning to transfer transmission assets worth Rs 75 billion to PowerGrid InvIT in 2022-23. The company has identified large assets, including the Power Grid Southern Interconnector Transmission System Project and the Nagapattinam Madhugiri Transmission Project, valued at Rs 50 billion for the transfer, along with its 26 per cent stake in one of the existing special purpose vehicles, Powergrid Vizag Transmission. The company is also open to evaluating transfer of cost-plus or regulated tariff mechanism projects to the InvIT as part of the central government’s Rs 42.5 billion NMP programme.
GAIL (India) Limited plans to launch an InvIT of its two gas pipelines between Dahej and Bengaluru, ahead of a proposed splitting of the pipeline business from the gas marketing function. These pipelines are Dahej-Uran-Panvel-Dabhol and Dabhol-Bengaluru. GAIL will retain a majority stake in the pipelines that run from Dahej in Gujarat to Dabhol in Maharashtra and from there to Bengaluru in Karnataka. The InvIT may involve selling 10-20 per cent stake initially. The two pipelines proposed for the InvIT have incurred a spend of over Rs 30 billion.
The enabling framework for InvITs has been a huge positive for boosting investor sentiment. The exemption of the dividend distribution tax 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, the acquisition of operational assets through InvITs will gain traction. Going forward, in the near to medium term, InvIT structures are expected to see healthy traction, which will be supported by the track record of entities that have already floated such structures, enabled regulatory developments and focused on attracting investments into the infrastructure space.
According to ICRA, fundraising through InvITs is estimated to go up to Rs 2 trillion in the next five years. Overall, 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 going forward.