Infrastructure Investment Trusts(InvIT)  are akin to mutual funds which are regulated  by SEBI  to enable investments into the infra sector by pooling together money from several individual investors for direct investment in infrastructure . In contrast to earlier methods like Infrastructure Bonds, these instruments provide a means for direct investment by individual investors in infrastructure mainly in revenue generating or completed projects. In the process they aim to return a portion of the income, after meeting expenses to unit holders of InvITs. This framework enables infrastructure developers to monetize completed assets. The initiative is path breaking and is likely to give a big fillip to investment & development of Infrastructure in the country.

The first such issue to raise 4654 crores comes from IRB Infrastructure Investment Trust and opens on May 3. On the flip side the offer is at present meant for people with deep pockets as minimum investment is Rs. 10 Lakhs and there is no precedent. SEBI notification of  September 26, 2014 SEBI (Infrastructure Investment Trusts) Regulations, 2014 , lays the framework for  registration and regulation of InvITs in India.

Salient features of InvIT:
    • InvITs are investment vehicle which enable infrastructure developers to monetize completed assets.
    • InvITs shall be set up as a trust and registered with SEBI. An InvIT shall consist of a  (ii) Sponsor(s) ii) Trustee (iii) Investment Manager and (iv) Project Manager. All these should be separate entities.
InvIT Framework

InvIT Broad Framework

  • Role of Different entities
    • A Sponsor is the one who Sets up the InvIT and appoints the trustee. The Sponsor has to hold minimum required percentage of total units  as per regulations. There are certain requirements set out under the InvIT Regulations, which includes: (i) an InvIT shall not have more than 3 Sponsors; (ii) each Sponsor shall have a net worth of not less than Rs.100 crores in case of a body corporate or a company, or net tangible assets of not less than Rs.100 crores in case it is a LLP (limited liability partnership).  Promoters or Sponsor(s), collectively, have to hold at least 25% in the InvIT for at least 3 years, except for the cases where a regulatory requirement/ concession agreement requires the sponsor to hold a certain minimum percent in the underlying SPV. In such cases the consolidated value of such sponsor holding in the underlying SPV and in the InvIT cannot be less than 25% of the value of units of InvIT on post-issue basis. Sponsor lock-in (a) 25% – 3 years; (b) above 25% – 1 year lock in.
    • A Trustee plays a supervisory role and shall be required to oversee the activities of the investment manager in the interest of the unit holders. The Trustee shall be registered with SEBI under the SEBI (Debenture Trustees) Regulations, 1993.
    • The Investment Manager shall make investments decisions with respect to the underlying assets/projects of the InvITs including further investment and divestment. Roles and responsibilities of the Investment Manager shall be specified in the agreement entered into between the Trustee and the Investment Manager.
    • The Project Manager shall conduct operations and management of a particular InvIT asset with a concessionaire SPV. The obligations of the project manager shall be set out in a project implementation agreement between the Project Manager, the concerned SPV and the Trustee.  In addition to the above, the Project Manager shall discharge all the obligations in respect of achieving timely completion of the infrastructure project in terms of the project management agreement.  In case of PPP, such obligations shall be in accordance with the concession agreement or such agreement entered into with the concessioning authority.
  • InvIT Regulations
    • The InvIT Regulations provides for certain eligibility requirements for grant of certificate to InvITs and SEBI, upon satisfaction, shall grant the certificate of registration to an InvIT under the InvIT Regulation
    • InvITs can  invest in infrastructure projects, either directly or through a SPV. In case of PPP projects, such investments can only be done through SPV. 
    • The trust can make investments subject to certain regulatory conditions which include investing at least 80% of the value of the assets in completed and revenue generating infrastructure assets and balance 20% in under-construction infrastructure projects and securities of infrastructure companies in India.
    • An InvIT cannot invest in units of other InvITs
    • .An InvIT shall hold or propose to hold controlling interest and more than 50% of the equity share capital or interest in the underlying SPV, except where the same is not possible because of a regulatory requirement/ requirement emanating from the concession agreement. In such cases sponsor shall enter into an agreement with the InvIT, to ensure that no decision taken by the sponsor,including voting decisions with respect to the SPV, are against the interest of the InvIT/ its unit holders
    • Sponsor(s) of an InvIT shall, collectively, hold not less than 25% of the total units of the InvIT on post issue basis for a period of at least 3 years, except for the cases where a regulatory requirement/concession agreement requires the sponsor to hold a certain minimum percent in the underlying SPV. In such cases the consolidated value of such sponsor holding in the underlying SPV and in the InvIT shall not be less than the value of 25% of the value of units of InvIT on post-issue basis.
    • The aggregate consolidated borrowing of the InvIT and the underlying SPVs shall never exceed 49% of the value of InvIT assets. Further, for any borrowing exceeding 25% of the value of InvIT assets, credit rating and unit holders’ approval is required.A publicly offered InvIT may invest the remaining 20% in under construction infrastructure projects and other permissible investments, as defined in the regulations. However, the investments in under construction infrastructure projects shall not be more than 10% of the value of the assets.
    • An InvIT which proposes to invest more than 10% of the value of their assets in under construction infrastructure projects certain other stipulations like it can raise funds only through private placement from QIBs & corporates. have minimum investment and trading lot of Rs. 1 crore,  have minimum of 5 investors with each holding not more than 25% of the units, distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to the investors, atl east on a yearly basis, undertake full valuation on yearly basis and declare NAV within 15 days from the date of such valuation etc. 
    • Detailed provisions for related party transactions. valuation of assets, disclosure requirements, rights of unit holders, etc. are provided in the Regulations.
  • InvIT IPO features
    • Listing shall be mandatory for both publicly offered and privately placed InvITs .
    • An InvIT IPO has only two type of investors, Institutional & Non Institutional. There is no retail category like normal IPOs. 75% is reserved for Institutions and 25% is reserved for Non Institutional investors.Similar to normal IPOs 60% of the Institutional bucket size can be allotted to Anchor investors
    • invIT can raise funds only through public issue of units. InvIT shall have a minimum 25% public float and at least 20 investors, have minimum subscription size and trading lot of Rs ten lakhs and Rs five lakhs respectively.
    • 1-year lock-in for investors (other than sponsors) holding units prior to initial public offer
    • Listing shall be mandatory for both publicly offered and privately placed InvITs and InvIT shall make continuous disclosures in terms of the listing agreement.
    • The proposed holding of an InvIT in the underlying assets shall be not less than Rs.500 crores (Rs.5 billion) and the offer size of the InvIT shallnot be less than Rs.250 crores (Rs.2.5 billion) at the time of initial offer of units. This means cumulative projects size ≥ INR 500 cr &  Issue size ≥ INR 250 cr.
    • An InvIT can raise funds by way of an initial offer and subsequently through follow-on-offer.
  • InvIT Profit Distribution & Taxation
    • An InvIT which proposes to invest at least 80% of the value of the assets in the completed and revenue generating Infrastructure assets, shall distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to the investors, atleast on a half yearly basis.
    • InvIt through a valuer, shall undertake a full valuation on a yearly basis and updation of the same on a half yearly basis and declare NAV within 15 days from the date of such valuation. 
    • If the units are sold within less than three years, then there will be short-term capital gain tax of 15%, while there will be no capital gains tax for sale of units beyond three years.
Summary:
  • InvIT are expected to benefit Major debt-laden infrastructure entities in India and provide  good  long-term refinancing options.
  • Mandatory listing of InvITs provides investment opportunity in infrastructure to a larger pool of investors and financial institutions (domestic as well as global).  
  • It will aid in reducing the exposure of Indian banking system to the Infrastructure segment
  • Invits will help in Transformation of business from an asset-heavy to asset-light model for Infra companies
  • InvITs are  a hybrid instrument which is neither pure equity nor pure debt. While it will be listed on the equity exchanges it isn’t pure equity (the scope for capital appreciation is negligible). InvITs cannot be called debt instrument because there is no assurance of payment of interest and principal.
  • Although the InvIT Regulations provide for mandatory listing of units of the InvITs, it needs to be if  trading of units picks us  or whether the listed units of InvITs will just face the same issues as in case of listed debt instrument which are not frequently traded.
  • InvIT s a new investment option and are positioned as high-dividend paying investments suitable for investors who are especially looking for long-term, stable cash flows with moderate capital appreciation.I
  • Investors of InvITs can draw comfort from a favorable tax-regime. Dividend income is tax exempt and no capital gains are levied if units are held for over 3 years and sold through the Exchanges.
  • It is apparent that SEBI considers the product as bit complex for retail and  thus SEBI guidelines have prescribed a minimum of Rs 10 lakh per application and minimum lot size of Rs 5 lakh to discourage retail participation.
Standard Disclaimer:  I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.