Banking Article, Banking Finance 2021, Banking Finance February 2021

Infrastructure Investment Trust in India

What is Infrastructure Investment Trust?

  • Infrastructure investment trusts, or InvITs, are instruments that work like mutual funds.
  • InvITs are designed to pool small sums of money from a number of investors to invest in assets that give cash flow over a period of time.
  • Part of this cash flow would be distributed as dividend back to investors.

In the layman’s term, they are the mutual funds for infrastructure projects.

 

How are they established?

  • To understand better, InvIts are established as a trust fund in which individuals, institutions or the companies can invest.
  • The trust fund is traded on stock exchange hence available for subscription.
  • The trust fund further invests the amount in the infrastructure projects.
  • On completion of the infrastructure projects, the revenue or the sales proceeds are distributed back to the investors in the form of dividends.

 

Why choose INVITs?

  • The primary objective of InvITs is to promote the infrastructure sector of India by encouraging more individuals to invest in it and can be modified according to a given situation.
  • Typically, such a tool is designed to pool money from several investors to be invested in income-generating assets. The cash flow thus generated is distributed among investors as dividend income.
  • When compared to Real Estate Investment Trust or REITs, the structure and operation of both are quite similar but difference lies in sector specific usage.
  • Often Infrastructure Projects such as Roads or highways take some time to generate steady cash flows. Meanwhile the infrastructure company has to repay the interest to banks for the loans taken  by it. An Invit essentially gives the company the leeway to fulfill its debt obligations quickly.

 

Structure of InvITs

The structure of InvITs can be broken down into four elements respectively, that is the Sponsor, Trustee Investment Manager & Project Manager.

Sponsor

The sponsor is the owner of the fund who has the responsibility of appointing a Trustee for the fund. The trustee can be an individual or a company who/which is not relate to or an associate of the Sponsor. The Sponsor must have 25% of the holding in the fund for a lock in period of 3 years.

Trustee

The trustee is a different entity from Sponsor but comes under the Sponsor. Trustee is responsible for overlooking the compliance & regulation guidelines laid down by SEBI. Trustee oversees the functions of the trust.

Investment Manager

It comes under the Sponsor but is a separate from Trustee. It has the sole purpose of looking at investment opportunities and carrying out the due diligence work. It handles the aspects related to the investment of the fund .

Project Manager

It comes under Investment Manager. Though they are also involved in day to day activities, their main aim is to oversee the operations and the management of project in which the fund has invested the amount.

SEBI Regulations – InvITs

  1. They can only be set up as Trust and not Companies or LLPs
  2. They need to be registered with SEBI and the respective Stock exchange board of the domestic country
  3. They need to invest minimum 80% of the total asset value of the fund in completed Infrastructure Projects (that is that they are revenue generation phase & have completed construction) with a 3 year lock in period)
  4. The remaining 20% of the total asset value can be invested in the following ways
  • In the projects under construction directly or through Special Purpose Vehicles. However, the limit cannot exceed 10% of total asset value.
  • Can be used to give out as loans to companies in Infrastructure sector (But not to another InvITs)
  • Can be invested in Stock of Infrastructure companies whose 80% or more revenue comes from infrastructure projects
  • Government Securities
  • They are invested only in projects in India directly or through SPV
  1. Dividends guidelines – 90% of the cash flows generated from Infrastructure projects or sale proceeds from the project needs to be distributed to investors as dividends every 6 months
  2. Public Offers
  • They need to have total asset value of minimum 500 crores
  • Investor can subscribe at minimum 10lacks per applicant o Public should be minimum of 25% of the asset value
  • Minimum offer size – 250 crores
  • Can buy and sell the InvITs in multiples of 5, that is, 5 lakhs, 10 lakhs and so on.

INVITS in India

India Grid Trust (Nov 28, 2016)

Established to own inter-state power transmission assets in India. IndiGrid was established on October 21, 2016 by Sterlite Power Grid Ventures Limited.

IndiGrid is India’s first power sector Investment Trust, sponsored by Sterlite Power Grid Ventures Limited (SPGVL), one of the leading independent power sector developers in India and Brazil.

  • June 2017 Listed on Stock Exchanges with two Initial Portfolio Assets with AUM of ~INR 38 Billion- BDTCL and JTCL
  • February 2018 Completed acquisition of first ROFO assets with AUM of ~INR 14 Billion – MTL, RTCL and PKTCL
  • August 2018 Completed acquisition of first third party asset with AUM of ~INR 2,250 Million – PTCL Successfully issued AAA rated Non-Convertible Debentures of ~INR 2,500 Million – First AAA rated debentures by an InvIT

 

  • April 2019 Amended InvIT regulations by SEBI increasing maximum leverage limit at InvIT from 49% to 70% Approved trading lot size reduction from ~INR 0.5 Million to ~INR 0.1 Million by SEBI .
  • May 2019 Raised INR 25.1 Billion of primary capital through Preferential Issue allotment to KKR, GIC and other capital market investors Received unitholder approval for induction of KKR* as an additional sponsor in IndiGrid and change in control of IM
  • June 2019 Completed acquisition of sponsor asset with AUM of ~INR 42 Billion – NTL

IndInfravit Trust (Mar 15, 2018)

  • The Trust is settled by L&T Infrastructure Development Project Limited (“L&T IDPL” or the “Sponsor”), an infrastructure development company in India.
  • The Trustee to the Trust is IDBI Trusteeship Services Limited (the “Trustee”) and Investment Manager for the Trust is LTIDPL IndvIT Services Limited (“Investment Manager”).
  • The Trust has been formed to invest in infrastructure assets primarily being in the road sector in India. All of the Trust’s road projects are implemented and held through special purpose vehicles (“Project SPVs” / “Subsidiaries”). The units of the Trust were listed in Bombay Stock Exchange and National Stock Exchange on May 09, 2018.

India Infrastructure Trust (Jan 23, 2019)

  • India Infrastructure Trust (“Trust”) has been settled on November 22, 2018 as a contributory irrevocable trust under the provisions of the Indian Trusts Act, The initial portfolio asset of the Trust is a pipeline system used for the transport of natural gas (“Pipeline”). The Pipeline is a cross-country, natural gas pipeline with a pipeline length of approximately 1,480 km
  • The Sponsor of the Trust is Rapid Holdings 2 Pte Ltd, a private company incorporated in Singapore. The Sponsor is part of the Brookfield Asset Management Inc. (“BAM”) group.
  • Penbrook Capital Advisors Private Limited, Investment Manager of India Infrastructure Trust India Infrastructure Trust (“Trust”) (Acting through Axis Trustee Services Limited in its capacity as Trustee of the Trust) & WIP (India) Private Limited (In its capacity as Investment Manager of the Trust)
  • On March 18, 2019, the Trust acquired 100% of the issued equity shares of Pipeline Infrastructure Limited (‘PIL’) (name changed from Pipeline Infrastructure Private Limited consequent upon conversion from a private limited company to a public limited company w.e.f April 25, 2019) which owns and operates the Pipeline
  • As at March 31, 2019, the Trust had 63,700 Non-convertible Debentures (‘Trust NCDs’) issued to banks and non-bank financial institutions, the proceeds of which were used to partially invest in the abovementioned PIL NCDs. The Trust NCDs attracted a coupon rate of 9.2786% payable quarterly and had a maturity of 5 years.
  • For the period of March 22, 2019 to March 31, 2019 the Trust earned INR 310.9 millions in interest income from PIL.

On April 23, 2019 PIL issued INR 64,520 millions of NCDs to banks and non-bank financial institutions. The proceeds were used by PIL to immediately repay 645,200,000 of PIL NCDs, and in turn the Trust used the proceeds to repay in full the 63,700 of the Trust NCDs at a clean redemption price of INR 1012873 per NCD.

Future Projects/Updates 

IndInfravit Trust (“IndInfravit”) and Sadhav Infrastructure Project Limited (“SIPL”) executed definitive agreements whereby IndInfravit has agreed to purchase the entire equity shareholding of SIPL in nine of SIPL’s operational road projects (“Roads Portfolio”) from SIPL. The transaction values 100% of the Roads Portfolio at an enterprise value of approximately INR 66,100 million.

The Roads Portfolio comprises seven toll roads and two annuity roads, with total 2,619 lane kms in Gujarat, Karnataka, Maharashtra, Rajasthan and Telangana, some of India’s most economically vibrant states. The roads forming part of the Roads Portfolio have been operational, on an average, for approximately six years, and are used by diverse groups of road users and commercial traffic. The states in which these roads are present contribute 0.39% to the GDP and 0.28% to the population of India.

On completion of the transaction, SIPL will receive the proceeds in cash and allotment of units of IndInfravit. Post-completion, SIPL will hold not more than 10 per cent unit-holding in IndInfravit. The InvIT platform clearly underlines how India remains an attractive destination for serious and committed long-term investors, and look forward to more such transactions in the near future

Benefits

  • The returns are 10-14% on the amount invested as compared to other mutual funds
  • Less volatility in InvITs
  • Leads to diversification of investments, reducing the risk
  • These funds are managed by professionals with experience in investing

Risks

  • Regulation Risk – Infrastructure projects include construction of Toll, Water Supply,Power Generation Projects etc.
  • The government may announce subsidy on the same as a part of their policy, reducing the returns to the investor
  • Frequent Policy changes & socio-political economic unrest might lead to halting of the project or delaying in its construction.

Investor’s Perspective

  • Parking funds into this investment option allows investors to generate fixed returns on the same. For instance, an infrastructure investment trust has to distribute 90% of its total net cash flow to its investors. It means that investors can generate steady earnings throughout the course of investment.
  • Additionally, investors also receive dividend income on their investment in case the InvITs have surplus cash flow.
  • InvITs are inherently less risky category among the various mutual funds out there as the majority of the investment is done the infrastructure projects which have already been completing and have started generating revenues.
  • The guidelines allow for the minimum risk exposure for the InvITS fund which encourages participation from investors who are looking for medium returns with regular dividend payment on the long term basis.
  • It will have a positive impact on the Infrastructure sector as the infrastructure project can be started without capital holding issues.

Conclusion

It is anticipated that investment in InvITs in India has a promising future and may prove beneficial in these following ways.

  1. Existing projects would be provided with substantial refinancing options in the long run.
  2. It would help disengage developer’s capital to facilitate reinvestment towards new infrastructure projects.
  3. It is expected to facilitate the refinancing of current debt with cost-effective capital for the long term.
  4. It would encourage international investors to invest in the Indian infrastructure sector.
  1. Prospects of increasing opportunity to diversify an investment portfolio with the help of quality infrastructure assets remain.

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