As the public offering of IRB’s InvIT opens for subscription today, all eyes are on this new investment vehicle which is expected to narrow down the crucial infrastructure funding gap in India. Several existing infrastructure projects under development are delayed due to the scarce funding.
The infrastructure sector is plagued with many issues. Infrastructure projects are highly capital intensive and therefore require huge sums to be invested. Also, the gestation period of these projects is quite long and positive cash flows can be expected only after the gestation period is over. Moreover, the payback period of infrastructure projects is even higher and therefore the actual profits for investors are much delayed. Sometimes, the projects themselves run into trouble over issues which are not under the control of the developers and such incidents put further doubts into the minds of investors whether they should invest in infrastructure projects or not.
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The Government of India has issued infrastructure bonds in the past to allow retail participation in infrastructure sector to reduce the funding gap but has not done so on a regular basis. Another route for investing in the infrastructure sector is investing in infrastructure mutual funds. These are funds which invest in companies either directly or indirectly involved in infrastructure development in India. Direct involvement is of companies in the Energy sector, Real Estate sector, Power sector, Metals sector etc. Indirectly involved companies can be from Banking and Finance sector, Transportation sector etc. However, these mutual funds allow investors to invest and liquidate their investments only at the daily NAV which is decided at the close of markets at 3:30 pm. This causes investors to miss out on timing their entry or exit for maximum returns.
InvITs are instruments that help infrastructure companies pass on debt to other investors at a lower cost and repay debt taken from banks. As per SEBI rules on InvITs, every six months, a minimum of 90% of funds collected – after paying for expenses, taxes and repayment of external debt – should be given to the investors. Dividend income coming from InvIT will be exempt from income tax. So, InvITs are like mutual fund instruments except that InvITs will be traded on the stock exchanges, which will allow investors to time their entry or exit to gain maximum profits.
At least half-a-dozen infrastructure companies have lined up Infrastructure Investment Trusts (InvIT) issues to get cheaper and long-term finance and better their ratings to bag newer projects. The companies which have already filed a draft offer document with SEBI or are in the process include MEP Infrastructure Developers, Reliance Infrastructure, GMR Infrastructure, Sterlite Power Grid Venture and IL&FS Transportation Networks. The initial public offer of IRB Infrastructure Developers’ Infrastructure Investment Trust (InvIT) – the first in India – opens for subscription today for an issue size of Rs 5,040 crore with a price band of Rs 100-102 per unit.