Invigorated participation in private InvITs is evidence that this is one of the most suitable modes of attracting capital for infrastructure in India. InvITs provide a convenient option for monetising assets, unlocking equity gains and de-leveraging the stressed balance sheets, thus freeing up capital for deployment in fresh projects. By MANISH R. SHARMA, DEVAYAN DEY & ANIRBAN PAL
The introduction of the Infrastructure Investment Trusts Regulations 2014 created a much-needed alternative instrument to recycle capital for infrastructure, which even today can go a long way in achieving the infrastructure investment target of Rs 1 trillion by 2024. While platform approach may be suitable for investors who may want to remain closer to asset and acquired assets through plain-vanilla deals, InvITs can be particularly attractive for "hands-off" investors. Nonetheless, even for"hands-on", the structure provided the right business case based on tax efficiency in terms of dividend distribution tax. Although under the current tax regime declared in this year's budget, such tax efficiency argument may remain questionable.
Five infrastructure players (in the roads and transmission sector) succeeded in utilising the instrument, kickstarting the adoption. Few months forward, for one of the public InvITs, however, the performance of the instrument lagged the Nifty Index. While it may not be proper to compare with Nifty Index given the dividends are much higher in InvIT, returns from higher dividend income have not yet succeeded in retaining the interest of the investors. For another one, stability and low-risk cashflows have somehow protected its price, although with very limited upside potential.
Why has InvIT not performed as desired?
It appears that investors had mistaken this instrument as a proxy of the equity market and its return corresponding to it. As a result, an equity yield of nearly 13-14 per cent was expected from this asset class (benchmarked to BSE or Nifty Index). However, it is important to mention that InvIT is not a classic equity product, but a hybrid product mimicking the behaviour of a mix of debt and equity products.
Further, the returns are directly related to the income generated by the underlying assets, i.e., toll and tariff for transmission assets. While returns from transmission assets are steady, providing an annualised return of 10-11 per cent, toll income is exposed to volatility in traffic. The recent ban on sand mining had hit the income generated by one of the players, thereby reducing the total income available for distribution to the investors. As a result, owing to reduced income, a decrease in the price of its InvIT fund has been evident. While the other InvIT structure provided a steady yield to investors (nearly 12 per cent) and held its ground on its fundamental price. The presence of a benchmark indicator (akin to Bank NIFTY) for comparison of returns is also very difficult to create because of sector-specific peculiarities in these InvITs.
Does the future look uncertain for InvIT structure?
Not really. As evidenced by the recent activity in the private equity market, there are 10 players who have already filed their prospectus with SEBI/launched them in the market. However, the players prefer to adopt the private route, primarily because they can negotiate the return/valuation expectations with the prospective investors. As a result, this structure has been able to attract the attention of foreign players such as sovereign wealth funds, pension funds to invest in them. Non-listing in the exchanges also removes the requirement of additional disclosures and filings which are mandatory for publicly traded ones. In addition, certain provisions are not applicable to private InvITs for improving the ease of doing business.
Is the government encouraging/discouraging investment in InvITs?
The government has been witnessing the influx of foreign funds in the Indian infrastructure market primarily through the InvIT structure. In order to make the structure tax-friendly, the Govt of India had tabled in the budget as a "tax pass" status. Previously being available to publicly listed InvITs only, the status has been made available to private InvIT structure as well. Hence, the "tax deferral" advantage implying that no tax implication would be present on the transfer of assets from the sponsor to the InvIT structure is made available. This makes the private structure at par with other public InvIT structures without necessarily dealing with regulations around insider training and price-sensitive information.
Would dividend distribution tax on remitted dividends hurt the interest of retail shareholders?
Prior to Budget 2020, InvIT structures were subjected to a single layer of tax, i.e. income tax. Cashflows distributed to shareholders were exempted from the dividend distribution tax to make the structure attractive. However, the same has changed post Budget 2020, where the Central Government has decided to tax the dividend received by the shareholder. This would have a cash flow impact reducing the returns to the investor. We are hopeful that this could be a temporary glitch and is likely to be sorted out soon.
Further, in order to boost the asset monetisation plan of Govt of India, the Reserve Bank of India (RBI) had allowed banks to lend to InvITs, in October 2019. Earlier, owing to the lack of clarity, banks were averse to providing credit facilities to InvITs. The InvITs, despite having stable cash flows on account of its portfolio of projects were not able to access the credit facilities offered by banks/financial institutions. Owing to the absence of bank lending to InvIT, debt was being availed at the SPV level leading to higher interest cost and operational complexity and, therefore, lower returns for the investor.
SEBI has also reduced the minimum value of lot from Rs 1million to Rs 100,000 for participation as this would enhance the base of investors looking to invest in such structures. The leverage limits for InvITs have also been increased from the existing 49 per cent to 70 per cent subject to making additional disclosures with debt sustainability indicators. In addition, it has also reduced the mandatory sponsor holding in InvITs to 15 per cent, removed the limits on the number of sponsors and reduced the requirements for private placements of InvITs.
All these amendments have been proposed aiming at assisting issuers in fundraising and increase access to these instruments.
What does the future hold for InvITs?
Invigored participation in private InvITs has alrea¼¼¼¼¼¼¼¼¼¼dy made it evident that this is one of the most suitable modes of bringing in the capital for infrastructure in India. As of August 2020, the total assets under management in InvITs are well over Rs 600 billion and are estimated to cross Rs 2 trillion in a slew of initiatives being brought in by SEBI and the government. InvITs provide a convenient option for monetising assets, unlocking the equity gains and de-leveraging the stressed balance sheets and freeing up capital for deployment in fresh projects.
NHAI is already working on bringing in an InvIT fund worth approx. Rs 200 billion.
Other CPSEs, such as Power Grid Corporation, have been tinkering with the idea of monetising its mammoth 145,000 km of transmission lines and 42,000 km of optical fibres. It won't be too long before other public and private operators come on board.v As the structure matures, we also expect to see penetration in open market economy sectors such as telecom infrastructure, ports and airports thereby moving slowly towards realisation of Rs 1 trillion investment in infrastructure.
About the authors
Manish R Sharma is Partner and Leader, Capital Projects and Infrastructure Practice, PwC India.
Devayan Dey is Director and Anirban Pal is Principal Consultant, Capital Projects and Infrastructure Practice, PwC India. Views expressed are personal.