The government has set a Rs 100 trillion investment target for national infrastructure pipeline projects over the next five years, out of which 12000 crores are to be spent on prioritized government infra projects.
By Dr. Neelam Rani and Apoorva Bansal
India is one of the fastest-growing countries globally, and Infrastructure is one of the critical areas for the sustained growth of the economy. Post this Covid-19 pandemic, and forthcoming yearly budget, a steep rise in infrastructure investment is expected. The government has set a Rs 100 trillion investment target for national infrastructure pipeline projects over the next five years, out of which 12000 crores are to be spent on prioritized government infra projects thereby, creating employment and laying a strong foundation for quick economic recovery.
Focus is on green projects, freight corridors, and commercial spaces, but private companies’ primary challenge is the need for more capital. The supply of money that was once catered by banks and financial institutions together has come to a near standstill due to the rise in non-performing assets, which resulted in a re-evaluation of their exposure in infra projects. Along with the limited supply, the cost at which additional funds are provided is also a concern.
India needs a creative solution to this problem, which can attract investors to this sector and simultaneously lower the funds’ cost. It seems that this problem was already foresighted by the policymakers back in 2014 when SEBI issued regulations around
Infrastructure Investments Trusts (InvIT), which were last amended in 2017.
Infrastructure Investment Trusts or InvITs, designed to aid the infrastructure players to swap their operating assets onto a platform that enables them to raise capital, which is akin to equity at the cost of debt(taken for infra projects).
What is an InvIT Structure: It is a trust formed together by four independent parties, initiated by sponsors from the SPV, the Investment Manager who manages the funds and investments, the Project Manager who takes care of the operations, and, finally, the trustees who oversee the trust. The trust is essentially a Special Purpose Vehicle (SPV) wherein at least 80% of assets should be operational and revenue-generating. Only 10% of the value of assets can be under construction projects for publicly listed InvITs. The investors and the sponsor consider it a lucrative option to generate attractive portfolio returns and the refinancing options through an InvIT trust, which can independently raise funds up to 70% of the assets’ value (leverage limit enhanced in 2018).
Currently, there are 13 InvITs registered on SEBI, out of which 11 entails for private investors into the road, transmission sector and two entails for the public sector by NHAI and PowerGrid (for the renewable sector). The renewable industry’s potential can be unleashed through this InvIT structure, and companies like Tata Power, Piramal are also eyeing this.
The structure’s upside is the tax exemption on dividend distribution and limited tax liability on the interest income, Strong Corporate governance, low portfolio risk, and assured returns as 90% of Net Cash Flow is distributed. Units are issued to the public investors who trade in InvITs, which often confuse them whether they have invested in equity or debt? So, InvIT is a hybrid instrument wherein the investor holding units represent the ownership of the equity share capital by way of underlying SPV(infra projects) and, at the same time, own the debt (advanced by the trust). But what makes this instrument more viable is the limited investor’s liability up to the amount invested in the trust and gives them the right to receive returns through cash distribution and vote on matters related to asset acquisition, appointment/change of investment manager.
However, two significant challenges that this structure might face are one, the sensitivity toward changes in regulations or tax laws as it gains popularity and widespread trading of units, and second, the ability to provide an attractive yield given the interest rate volatility.
All in all, this structure does open opportunities for sponsors to create a steady stream of capital at a lower cost, which can indirectly spur the investments into the infrastructure segment. For investors, it would turn out to be a good investment under a controlled risk horizon.
(Dr. Neelam Rani is an Associate Professor (Finance) at Indian Institute of management Shillong. Apoorva Bansal is an alumnus of IIM Shillong. Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)