K.R.Srivats | New Delhi, May 11 |
What are InvITs?
Infrastructure Investment Trusts (InvITs) are investment instruments that work like mutual funds and are regulated by SEBI. Typically, such a vehicle is designed to pool money (small sums) from several investors to be invested in income-generating assets. InvITs are mostly structured as trusts, and an independent trustee holds assets on behalf of unitholders. InvITs could be set up for sectors defined under the infrastructure as per RBI guidelines. So far, developers engaged in the road, power transmission, gas pipelines and tower transmission have formed InvIT.
How are InvITs different from REITs?
REITs and InvITs are conceptually like mutual funds, where a sponsor raises capital and invests it in infrastructure or real estate projects. While REITs comprise a portfolio of commercial real estates, a major portion is already leased out, InvITs comprise a portfolio of infrastructure assets such as highways and power transmission assets.
While InvITs invest in infrastructure projects such as roads or highways, which take some time to generate steady cash flows, Real Estate Investment Trusts (REITs) are an investment vehicle that owns and manages investment grade and income-producing real estate properties such as offices, malls, industrial parks, warehouses, hospitality and healthcare centres. While InvITs can be publicy listed, private listed or private unlisted, REITs must be publicly listed. Regarding income stability, REITs provide stable income and yield as 80 per cent of REIT assets are income-generating assets with long-term rental contracts. On the other hand, InvITs’ cash flows are less certain as they are dependent on multiple factors, including the capacity utilisation of the underlying assets and scalability of tariffs.
For InvITs, growth depends on the successful acquisition of concession assets through a bidding process. InvITs comprise concessions where the projects are returned to the authority or rebid post the concession period. On the other hand, REITs own the property leased out and their underlying assets see growth in value over time and have high terminal value. REITs have greater visibility of growth, which can be achieved by redeveloping existing assets, new construction, and acquiring completed leased assets.
REITs are more accessible to small investors and have higher liquidity due to lower unit prices and trading lots. On the other hand, InvITs have a bigger trading lot size and thus somewhat poor liquidity.
How do they operate?
A REIT/InvIT is established as a trust settled by the sponsor under the Indian Trusts Act, 1882 and the trust deed registered in India under the Registration Act, 1908. Also, a Certificate of Registration as REITs and InvITs needs to be obtained from SEBI.
There are various parties involved in REITs and InvITs, such as a sponsor, trustee, and investment manager. Distributions by REITs and InvITs are based on Net distributable cash flows (NDCF), unlike companies where dividends are based on profits. These distributions are declared and made at least once every six months for publicly offered REITs and InvITs and once a year for privately placed InvITs.
Investors receive periodic pay-outs of a minimum of 90 per cent of NDCF. However, unlike mutual funds, both InvITs and REITs also have characteristics of a business enterprise. While REITs and InvITs raise debt through a trustee and an investment manager, they are also actively involved in projects to maximize returns to shareholders.
How critical are InvITs for funding India’s infrastructure projects?
InvITs present attractive investment opportunities and are only expected to take wings given the huge expected government outlay for infrastructure projects. The government had already identified InvITs as a way to attract large institutional long term investors in infrastructure space.
The Government’s National Infrastructure Pipeline estimates funding requirements of over $1.4 trillion by 2025. Of this, private sector investment in infrastructure is expected to be at least $325 billion. A large portion of this could come through InvITs. To allow for capital recycling and further investments under PPP modes, InvITs play a key role in the monetisation of existing projects in some of these sectors (with conducive regulatory frameworks, cash flow profile, and taxation advantage). InvIT helps developers release their invested equity and deploy capital in new projects. This could enable them to address the challenge of projects with high capex demands. Another advantage of InvITs for companies is that proceeds raised from such vehicles are not counted as debt. Similarly, as the company launching InVIT does not dilute any of its shares in the process, it does not count as equity either.
How many InvITs are there today and how much have they raised so far?
At present, 15 InvITs are registered with SEBI, and seven are listed on the stock exchanges. The market cap of the listed InvITs is over $10 billion. A total of ₹21,195 crore was collected through InvITs in 2021-22. This included money collected by unlisted InvITs. The funds were raised through initial offer, preferential issue, institutional placement and rights issue.