By Dr. Neelam Rani and Apoorva Bansal
India is one of the quickest-expanding nations globally, and Infrastructure is one of the important locations for the sustained development of the economy. Post this Covid-19 pandemic, and forthcoming yearly price range, a steep rise in infrastructure investment is anticipated. The government has set a Rs one hundred trillion investment target for national infrastructure pipeline projects more than the next 5 years, out of which 12000 crores are to be spent on prioritized government infra projects thereby, developing employment and laying a robust foundation for rapid financial recovery.
Focus is on green projects, freight corridors, and industrial spaces, but private companies’ principal challenge is the require for more capital. The provide of cash that was after catered by banks and monetary institutions collectively has come to a close to standstill due to the rise in non-performing assets, which resulted in a re-evaluation of their exposure in infra projects. Along with the restricted provide, the expense at which added funds are supplied is also a concern.
India requirements a inventive remedy to this dilemma, which can attract investors to this sector and simultaneously reduced the funds’ expense. It appears that this dilemma was currently foresighted by the policymakers back in 2014 when SEBI issued regulations about
Infrastructure Investments Trusts (InvIT), which had been final amended in 2017.
Infrastructure Investment Trusts or InvITs, developed to help the infrastructure players to swap their operating assets onto a platform that enables them to raise capital, which is akin to equity at the expense of debt(taken for infra projects).
What is an InvIT Structure: It is a trust formed collectively by 4 independent parties, initiated by sponsors from the SPV, the Investment Manager who manages the funds and investments, the Project Manager who requires care of the operations, and, ultimately, the trustees who oversee the trust. The trust is basically a Special Purpose Vehicle (SPV) wherein at least 80% of assets need to be operational and income-creating. Only 10% of the worth of assets can be below building projects for publicly listed InvITs. The investors and the sponsor think about it a profitable solution to create eye-catching portfolio returns and the refinancing possibilities by way of an InvIT trust, which can independently raise funds up to 70% of the assets’ worth (leverage limit enhanced in 2018).
Currently, there are 13 InvITs registered on SEBI, out of which 11 entails for private investors into the road, transmission sector and two entails for the public sector by NHAI and PowerGrid (for the renewable sector). The renewable industry’s possible can be unleashed by way of this InvIT structure, and providers like Tata Power, Piramal are also eyeing this.
The structure’s upside is the tax exemption on dividend distribution and restricted tax liability on the interest revenue, Strong Corporate governance, low portfolio threat, and assured returns as 90% of Net Cash Flow is distributed. Units are issued to the public investors who trade in InvITs, which typically confuse them regardless of whether they have invested in equity or debt? So, InvIT is a hybrid instrument wherein the investor holding units represent the ownership of the equity share capital by way of underlying SPV(infra projects) and, at the exact same time, personal the debt (sophisticated by the trust). But what tends to make this instrument more viable is the restricted investor’s liability up to the quantity invested in the trust and provides them the appropriate to get returns by way of money distribution and vote on matters connected to asset acquisition, appointment/modify of investment manager.
However, two considerable challenges that this structure may well face are one, the sensitivity toward adjustments in regulations or tax laws as it gains recognition and widespread trading of units, and second, the capability to provide an eye-catching yield offered the interest price volatility.
All in all, this structure does open possibilities for sponsors to generate a steady stream of capital at a reduced expense, which can indirectly spur the investments into the infrastructure segment. For investors, it would turn out to be a excellent investment below a controlled threat horizon.
(Dr. Neelam Rani is an Associate Professor (Finance) at Indian Institute of management Shillong. Apoorva Bansal is an alumnus of IIM Shillong. Views expressed are private and do not reflect the official position or policy of the TheSpuzz Online.)