Infrastructure investment trusts (InvITs) are investment instruments for the infrastructure sector that are regulated by the Securities and Exchange Board of India (SEBI) and act as mutual funds. In India, InvIT regulations have evolved significantly since 2017, with the government promoting them for domestic and foreign investors. The government is also increasingly focusing on InvITs to monetise assets and encourage public participation. According to SEBI, 23 InvITs were registered in India as of November 30, 2023. Industry experts claim that InvITs will become crucial for the long-term growth of the economy.
Evolving scenario
In the past five years, InvIts have witnessed steady growth, backed by regulatory support and an enabling framework put in place by SEBI. An InvIT has three key elements, which include a sponsor, an investment manager and a trustee. With the evolution of the regulatory framework, the roles and responsibilities of the trustee not only extend to ensure the compliance of the investment manager but also to ensure that the ecosystem grows in a manner where governance and disclosure norms are properly maintained, protecting the interests of the investors and unit holders. Regulators such as SEBI, the Pension Fund Regulatory and Development Authority and the Insurance Regulatory and Development Authority of India have made efforts to understand the benefits these platforms can provide. It is also important to educate and create awareness about InvITs, and understand the factors that could potentially limit investments in the product.
Over the years, measures such as increasing the leverage and reducing the investment lot size have expanded the pool of investors. When InvITs were first introduced, foreign institutional investors were the dominant investor class that understood business trust yield platforms. However, today, InvITs have seen participation from insurance companies, pension funds, banks, financial institutions and foreign portfolio investors, among others. Several commercial banks have also embraced the product and are providing substantial lending support to InvITs. However, there are still large banks, especially public sector banks, that remain sceptical about lending to InvITs. While these banks are willing to lend on a project finance basis to greenfield projects, they remain reluctant to extend loans at the InvIT level, where cross-collateralisation exists. Onboarding public sector banks will not only ensure scale in investment but also encourage retail participation.
Securing an AAA rating was difficult a few years ago, especially for InvITs with assets backed by state discoms. In addition, the boundary conditions imposed by rating agencies initially made it difficult to invest in InvITs. These stringent conditions have now been relaxed. The National Highways Authority of India and the Power Grid Corporation of India were the first among the public sector units to launch InvITs as part of their monetisation plans. At present, the product constitutes a large part of their strategy to monetise their assets, ensuring capital availability for the next cycle of greenfield projects.
Going forward, the InvIT ecosystem will witness growth similar to that of mutual funds. Approximately Rs 1 trillion has been invested in these structures, and this figure is expected to increase by at least seven to eight times in the next five years. Further, many new sectors will also establish InvITs in the near future.
Industry expectations
Enabling governance is imperative for the growth of InvITs. It is essential to establish long-term policies and regulations in order to ensure a definite rate of return for investors. With regard to this, regulatory intervention is required on the taxation aspect of InvITs. InvITs are traded on the equity desk of stock exchanges, where securities transaction tax is applicable. However, in the case of sale of units, long-term capital gains (LTCG) taxation rules are applicable if InvIT units are held for more than three years. For the sale of equity, LTCG taxation rules are applicable if the stock is held for more than 12 months. Thus, it is imperative for SEBI to address this aspect and bring InvITs at par with equity. With its classification as equity, different classes, such as exchange-traded funds, will get a chance to participate in InvITs, thereby creating liquidity.
It is also essential for the government to view InvITs as acquisitive vehicles and bring in more assets to increase the scope of monetisation and fundraising. Further, keeping in line with the goal of derisking sponsors and providing them with an exit, SEBI should proceed with the concept of self-sponsored InvITs. This will create space for mature and independent investment managers to emerge, and provide a further exit option for sponsors, in addition to the exit option through the change of sponsors. This will help the country move towards professionally managed InvITs. Further, it is important to view the trustee as an independent entity that, in a fiduciary capacity, is working solely in lieu of the fee that it receives.
Sectoral factors affecting InvITs
Roads, power, and oil and gas are the three key sectors that launched InvITs in India. In the road sector, there is a lack of monetisation of state assets. While the monetisation of national highways is under way through InvITs or the toll-operate-transfer model, there is a huge potential to monetise state-level road assets, especially large-scale projects. Thus, it is essential to formulate policies for the monetisation of state assets as well, as there is a robust pool of such assets available for private investment. Similarly, in the oil and gas sector, an InvIT for just one natural gas pipeline has been launched. It is essential for the government to start focusing on city gas distribution pipelines, product pipelines, etc.
The renewable sector faces issues due to a lack of available project pipelines for monetisation. Further, in the case of acquisitions, the clauses defining the sale and purchase of assets pose a major challenge. For instance, if the acquisition of an under-construction asset makes sense from an economic point of view, less than 51 per cent cannot be acquired until the commercial operation date (COD), according to the InvIT regulations. As per the power purchase agreement (PPA), a developer cannot sell more than 51 per cent of the asset until one year after the COD. This is a key challenge that leads to missed opportunities in the renewable energy sector. The sector is also witnessing a gradual shift from PPAs with central/state governments to PPAs with commercial and industrial customers. This has the potential to expand the pool of assets that can be included under InvITs. In fact, the platform can also be explored for hydro assets, which are long term in nature.
In sum
InvITs have evolved tremendously in the past few years. According to industry experts, InvITs and real estate investment trusts present opportunities of around Rs 20 trillion. However, it is essential to raise more awareness about the fundraising mechanism for it to gain momentum. Going forward, it is essential for the government to introduce more assets. Warehousing, water and railway assets should be incorporated into the InvIT structure in order to increase monetisation. Along with this, given the adequate regulatory oversight, some relaxation is welcomed. InvIT issuers should also explore options for garnering domestic capital to make the product more attractive. Tax exemptions on InvITs are another way of attracting investments. Further, it is important not to generalise sectoral InvITs, as the risk returns for each sector differ.
Based on a panel discussion between industry experts at a recent India Infrastructure conference on InvITs and REITs