Promising Avenue: InvIT experience and potential in the infrastructure sectors

The draft regulations for infrastructure in­ve­stment trusts (InvITs) were issued in 2014, allowing companies to raise funds in infrastructure projects through a trust. This was followed by the first funding in 2017. The three-year lag in the timeline represents the ambiguity in the regulatory framework. How­ev­er, over time, the market has evolved. With favo­u­rable returns from the first few initial InvITs, including the IRB InvIT and IndiGrid trust, a lot of interest has been generated in this space.

In 2019, the Canada-based Brookfield Ass­et Management’s InvIT acquired the 1,480 km long East West Gas Pipeline (EWGP), previously owned by Reliance Industries Limited, along with 100 per cent equity interest in the owner and operator Pipeline Infrastructure Limited (PIL). For years, the InvIT has worked with regulators to welcome previously excluded insurance companies and pension players. In addition, the InvIT is focused on expanding in the oil and gas sector, and exploring pipelines, terminals and city gas distribution. The EWGP pipeline spans five sta­tes and has a capacity of 85 mmscmd. It can transport about 25 per cent of India’s gas capa­city. PIL is currently working to repurpose a pipe­line to flow hydrogen as well. Additionally, the tru­st is looking forward to the government di­vesting a bundle of assets.

After more than four years in operation, the first privately placed but listed InvIT, the Ind­Infravit Trust, was originally sponsored by the Larsen and Toubro (L&T) Group. The trust is ba­ck­ed by three long-term sovereign wealth funds and pension players including CPP Inve­st­ments and Omers from Canada and Allianz Capital Partners from Germany. The InvITs’ current portfolio consists of 13 operating road assets spanning roughly 5,000 km, with an enterprise value of about Rs 120 billion. In an effort to expand further, the trust has si­gned other dea­ls. However, the road sector remains a primary investment focus.

Virescent Infrastructure, a relatively young renewable energy dedicated InvIT, is sponsored by KKR. Over the next 24-36 months, the In­vIT’s strategy is to grow through brownfield ac­quisitions. The total operational capacity of the existing portfolio is 538 MW.

IndiGrid Trust, the first transmission InvIT, got listed in 2017. Initially a pure-play transmission-oriented InvIT, the trust currently has around 7,700 circuit km of transmission line length and 15,000-16,000 km megavolt-amperes of transformation capacity. Although it was founded by a private developer, Sterlite, the InvIT is now a 100 per cent professional managed entity backed by the financial sponsor, KKR. In 2020, the growth strategy pivoted towards solar assets in the renewable space. Shortly after, contracts for large-scale battery storage emerged as a new focus area. The InvIT secured its first green field transmission project in December 2021. It owns a 100 MW operational solar plant in Andhra Pradesh, with all other transmission assets spanning across almost 20 states.

In 2018, a handful of assets were put up on block sale, however, they did not receive the desired price. The best way to monetise these assets was found to be InvITs, which led to the creation of the IL&FS Group InvIT solely for road assets. This IL&FS Transportation Networ­ks Limited-sponsored InvIT has around 300 sha­reholders and is focused on 11 assets wo­rth over Rs 170 billion.

Government support

Over the past five years, InvIT regulations have evolved significantly. The government has promoted this investment class to domestic and foreign investors. In addition, it is increasingly utilising the InvIT route to monetise assets and encouraging widespread public participation.

On the lending side, the biggest game changer for InvITs and real estate investment trusts (REITs) has been the increase in leverage gap from 49 per cent to 70 per cent, subject to certain caveats. Similarly, the diversification of lending sources has propelled InvITs and REITs into a special category, as it offers unit holders a higher rate of return and more stability. Initially, InvITs and REITs were simply non-convertible debentures subscribed to by a select set of mutual funds. The subsequent expansion to in­surance companies, pension funds, banks, fin­ancial institutions and foreign portfolio investments represents a positive development.

In the eyes of unit holders, InvITs and REITs previously lacked liquidity. However, over time, the market regulator, Securities and Exchange Board of India has made changes to address this, including reducing the lot size from Rs 0.5 million to Rs 0.1 million to attract retail inves­tors and revising the trading lot to one unit. An­other notable regulatory development involves raising equity through preferential allotment, qualified institutional placements, and rights issuances. The conversion of InvITs from private to publicly listed entities has been embra­ced, as has the classification of the sponsor. The proposals relating to the discontinuation of a separate regulatory framework for unlisted InvITs have also been cleared.

Industry expectations

Governance is synonymous with InvITs. For in­vestors with a medium to long-term horizon, ex­emplary governance is necessary to ensure ethical practices, regulatory compliance, and adherence to environmental, social, and governance standards. Another important factor is anticipating the short-term challenges that may arise once greenfield projects become operational. Moreover, the inclusion of publicly listed InvITs in indices can significantly boost liquidity and attract institutional investors.

Frequent policy and regulatory changes do not ensure a definite return for investors. Thus, policies should be effective for a longer duration. Further, InvITs should be utilised in new se­­ctors instead of already dominant spaces li­ke power, oil and gas, and roads.

Challenges faced

There are still a few challenges that need to be addressed before InvITs can become a widely accepted investment vehicle in India. For ins­tance, the long gestation period may cause a delay in generating returns, which is a cause for concern.

A common challenge faced by various classes of investors is the likelihood of a conflict of interest among buyers, sellers and investment managers of an asset. In addition to driving gro­wth, InvITs offer investors access to infrastructure projects with high yields. However, examining the growth trajectory can be complex.

Each industry has its unique nuances. For example, transmission assets have a 25-year life­span, which makes them the most secure kind of infrastructure asset. Toll roads, on the ot­her hand, are subject to traffic and tariff risks, but offer protection against inflation. Re­ne­wable energy assets have a lifespan of 20-25 years, but wind assets tend to have greater variability than solar assets. In the road sector, the state governments need to take a proactive approach to ensure that state highways are able to generate revenue on par with national highways.

One of the key challenges is to consolidate the assets in such a way that they are cr­o­ss-subsidised, allowing underperforming as­s­ets to be compensated by other special purpose vehicles. However, the various stakehol­ders and key parties involved are yet to fully adopt this concept.

Based on a panel discussion between Anurag Dwivedi, Partner Projects and Project Finance, Shardul Amarchand Mangaldas and Co; Pawan Kant, CEO, IndInfravit Trust; Akhil Mehrotra, MD and CEO, Pipeline Infrastructure Limited; Parin Mehta, CFO, Virescent Infrastructure Investment Managers; Meghana Pandit, Chief Investment Officer, IndiGrid; Manish Satnaliwala, SVP and CFO, Roadstar Investment Managers Limited (IL&FS Group InvIT), and Praveen Sethia, Founder and Director, Infrastructure Advisors Private Limited.