What are InvITs?
InvITs or infrastructure investment trusts are collective investment vehicles similar to mutual funds. They pool money from individual and institutional investors and invest in infrastructure projects or assets such as roads, power plants, and pipelines. The investors earn a return from the income the asset generates.
They are becoming a popular investment option for private equity investors and infrastructure developers. Private equity investors can diversify their investments and earn from the growing infrastructure projects in the country. On the other hand, infrastructure companies or developers monetise their investment in infrastructure projects.
Infrastructure companies use InvITs to pay back their debt quickly and effectively. Since infrastructure companies take time to generate cashflows, InvITs come in handy to pay interest on loans and handle other expenses.
Structure of InvITs in India
SEBI (Infrastructure Investment Trusts) (Amendment) Regulations, 2014, in India governs InvITs. The structure is similar to trusts, and an independent trustee holds the income-generating assets on behalf of the unit holders.
It consists of four elements: trustee, sponsor, investment manager, and project manager.
- Trustee: It is important for the trustee to register with SEBI as a debenture trustee and invest at least 80% in the income-generating infrastructure assets. A trustee also inspects the performance of the InvIT.
- Sponsor: A sponsor is a company, limited liability partnership (LLP), or corporate body with a net worth of at least INR 1,000 million. They must hold at least 25% of the total assets in the InvIT with a lock-in period of three years.
- Investment manager: A LLP, company, or organization that supervises the activities, assets, and investments of an InvIT.
- Project manager: A project manager is a person who is an authorizer to overlook the activities of a project and ensure its timely execution as per the agreement. In the case of a public-private partnership (PPP), the project manager is also responsible for the execution of other ancillary project activities.
Types of InvITs
Investors can invest in InvITs in two ways. One is directly or through special purpose vehicles, classifying them into two types.
- Finished infrastructure projects: Finished revenue-generating projects can be the underlying assets. They invite investors through a public offering.
- Under-construction infrastructure projects: It can have under-construction projects as its assets. These pool money from investors through private placement.
How do InvITs Work?
Infrastructure investment trusts own, operate, and manage revenue-generating infrastructure projects and assets. In the long term, these assets earn cashflows which are distributed to the investors. They operate like equity and debt instruments. The steady cashflows ensure predictable low-risk returns just like debt instruments, and the growth potential of the assets will lead to capital appreciation similar to equity.
Features of InvITs
- These are long-term investments as the underlying assets have long-term contracts and offer a steady cash flow for 15-20 years.
- The growth is usually high for these instruments as they keep adding more operating projects in the trust resulting in a high yield.
- The main purpose of InvITs is to mitigate under-construction risk in the infrastructure sector. This is because 80% of the investments must be made in completed or revenue-generating assets.
- These trusts distribute almost 90% of the cash flows to the investors, ensuring steady cash flows.
- InvITs can trade on the stock exchange like equity stocks. The minimum investment amount is Rs 10,000 – Rs 15,000 with a minimum lot size of one unit.
Advantages of InvITs
- Low-risk investments: InvITs are low-risk investments. This is because at least 80% of the investments must be made in completed or revenue-generating assets as per SEBI regulations. Also, they must not invest more than 10% in under-construction assets. This reduces the biggest risk of construction – delay in completion.
- Predictable cash flows: InvITs offer steady and predictable cash flows. They have to distribute the 90% of the cashflows generated by the assets to the investors. Long-term investors seeking steady cashflows can consider this for investment.
- High-quality assets: The underlying assets of InvITs are of high quality. They also have low demand, hence low price-related risks. The assets are usually transmission projects, gas pipelines, telecom towers, etc. The project life of these assets is usually 15-20 years, making them ideal for long-term investing.
- High liquidity: InvITs have no lock-in period and can be easily traded on the stock exchange. One can sell them just like mutual fund units of open-ended funds. After SEBI reduced the lot size to one unit, the liquidity of InvITs further improved.
- Diversification: InvITs are excellent tools for diversification. Investors looking to diversify their portfolio can consider them for investment as they do not have any price-related risks.
- Risk-adjusted returns: InvITs are low-risk investments as they give predictable cashflows. Compared to the risk taken, they give a very high return in the long term. Moreover, many investors use them to hedge a portfolio against market risk, as their beta is much lower than equity investments.
- Strictly regulated: SEBI regulates InvITs. There are rules for underlying assets and cash flow distribution. Moreover, there are regulations with respect to independent trustees, valuation by independent valuers, leverage caps, and disclosure policies. All these ensure to protect investor’s interests.
- Tax structure: The taxation of InvITs is like equities. In the short term (less than three years), the gains are taxable at 15%. In the long term, gains exceeding Rs 1 lakh are taxable at 10%.
Risks of InvITs
When investing in InvITs, investors must be cautious about the following risks.
- Operational risks: There can be delays in collection, ad hoc expenses, or even tariff changes. All these affect the cashflows of the business. Hence it is important to invest in them with quality assets.
- Refinancing risk: Debt is the major source of funding for most infrastructure projects. Fluctuations in interest rates can pose a refinancing risk. Hence it is important to choose assets with an AAA rating.
- Regulatory risks: They are considerably new to the investing space and have strict regulations. Hence any regulation changes can impact the cashflows.
- Return risk: Public InvITs trade on the stock exchange just like equities. Also, they can be exposed to capital gains and losses. Apart from this, the cashflows can vary for different years as they depend on the underlying business. Hence there is always an uncertainty of returns.
REITs Vs InvITs: Key Differences
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) operate similarly, just like mutual funds, but they are very different.
- Assets: The underlying assets for REITs are commercial real estate properties such as offices, malls, warehouses, etc. In contrast, the underlying assets of InvITs are infrastructure assets like highways, power transmission towers, etc.
- Public listing: REITs must be publicly listed, but InvITs can be publicly listed, privately listed, or privately unlisted.
- Income stability: Close to 80% of the REITs have long-term contracts linked to income-generating assets providing income stability. In contrast, the cashflows of InvITs are less stable and depend on multiple factors, such as the scalability of tariffs, capacity utilization, and regulations.
- Growth prospects: REITs have a better growth prospect as they own the underlying assets, which grow in value over time. Moreover, the assets can be repaired and redeveloped, which indicates better prospects. On the other hand, the growth of InvITs depends on acquiring the assets.
- Accessibility to investors: REITs have a low unit price and trading lots and hence are more liquid and accessible to investors than InvITs.
Frequently Asked Questions
No, InvITs are taxable similar to equity investments. However, the holding period is three years. If the investor sells the investment before three years, the capital gains are taxable at 15%. However, if they sell it after three years, the capital gains above Rs 1 lakh are taxable at 10%.
Publicly listed InvITs can be traded in the secondary market. In the case of privately listed InvITs, the units can be sold just like mutual funds.
SEBI (Infrastructure Investment Trusts) Regulations, 2014 governs the InvITs