InvIT – Infrastructure Investment Trust
InvIT – Infrastructure Investment Trust is a trust having a structure similar to mutual funds where they pool the money of investors and invest in infrastructure projects to generate income. In India, InvITs are governed by the SEBI InvIT Regulations 2014.
What is InvIT?
InvITs collect money in small amounts from investors and pool it together for investing in infrastructure projects. The InvIT issues shares to generate funds and they are openly traded on the stock exchanges. The main objective of InvITs is to promote investments in the infrastructure sector. An investor will own both debt and equity of the InvIT.
InvITs generally invest their money in infrastructure projects such as Renewable projects, Road projects, Power Transmission projects, and many more like this. All types of investors such as individuals, institutions, and companies can invest in InvITs.
How InvIT works?
InvITs raise money from the public through IPOs and use this money to invest in income-generating infrastructure projects. In return, the investors are issued units in the InvIT for the amount they invest and get access to a regular stream of cash flows generated from infrastructure projects in the forms of dividends and interest income.
The InvIT invests in infrastructure projects either directly or through an SPV. A Special Purpose Vehicle (SPV) is a separate entity created for a specific project or business. The main motive behind creating the SPV is to protect the InvIT in case of failure of the infrastructure project in which money is invested by the InvIT. It is generally done when undertaking a risky project.
Structure of InvIT
An InvIT consists of 4 entities that look after its functioning and day-to-day operations.
- Sponsor: The Sponsor is the infrastructure development company that originally owned the infrastructure assets of the trust and is the promoter of InvIT. They are responsible for setting up the InvIT and appointing the trustee. The Sponsor should hold a minimum of 25% post IPO with a 3-year lock-in period.
- Trustee: The trustee is appointed by the Sponsor and is a separate entity. Once the trustee is formed, the control and ownership of InvIT assets are shifted from the Sponsor to the Trustee. For regulatory reasons, they are required to register with SEBI as a trustee. The trustee is tasked with the responsibility of ensuring timely payment of dividends and ensuring that the InvIT meets other regulatory compliances.
- Investment Manager: The investment manager is appointed by the trustee. The main task of the investment manager is to ensure optimal returns from existing investments, conduct due diligence on new investment opportunities, and take investment decisions for a new project. They are also tasked with supervising the project manager’s work.
- Project Manager: The project manager is appointed by the trustee and looks after the day-to-day infrastructure operations.
Regulations governing InvITs
- The InvIT should be set up as a trust and not a company or LLP
- It has to be registered with SEBI and listed on the Stock Exchanges
- A minimum of 80% total asset value should be invested in completed revenue-generating infrastructure projects with a 3-years lock-in period
- The remaining 20% of total asset value can be invested in:
- Under Construction Project: Investment can be made directly or through an SPV and the maximum investment allowed is 10% of the total asset value
- Listed or unlisted debt of Infra companies
- Listed company stocks, which generate at least 80% of their revenue from Infra Sector
- Government Securities
- Cash, Money Markets or Liquid Mutual Funds
- The InvIT has to invest in infrastructure projects only in India either directly or through an SPV
- Investments in Public-Private Partnership Projects (PPV) should be only done through an SPV
- Investment or lending to others InvITs is not allowed
- Maximum debt allowed for InvIT is 49% of total asset value
- Dividends: InvITs have to distribute 90% of the cash flows generated from infrastructure projects as dividends. The distribution of dividends should take place every 6 months. InvITs have to distribute 90% of sales proceeds as dividends unless the proposal for reinvestment is accepted by shareholders.
Public Offer of InvITs
The IPO of InvIT is accepted only if it meets certain conditions as below:
- Total Asset Value of InvIT should be greater than Rs. 500 Crore
- Minimum Public Float: 25%
- Minimum Offer Size: Rs. 250 Crore
- Minimum Subscription Amount: Rs. 1 Lakh per applicant
- Minimum number of unitholders (Other than Sponsor): 20
How to buy InvIT?
You can buy InvITs through the IPO route or from the secondary market. From June 2021, SEBI has changed regulations enabling you to buy an InvIT at a minimum price ranging from Rs. 10,000 – Rs. 15,000 in the secondary market and even trade in a single lot.
Types of InvITs
- Based on Ownership
- Privately Held InvITs: This type of InvIT is not listed on the stock exchange. They receive funds through private placement and are held by a small number of individuals and institutions.
- Public Listed InvITs: This type of InvIT is listed on the stock exchange and can be easily traded on the stock exchanges. Both institutional and retail investors can invest in this InvIT.
- Based on Investment Projects
- Investment in revenue-generating finished projects: InvITs falling under this category invest in revenue-generating finished projects. They generally opt for a public offering to get funds from investors.
- Investment in projects under construction: InvITs falling under this category invest in infrastructure projects that are under construction or have been finished. They generally opt for private placement to get funds.
Why are InvITs created?
Infrastructure projects such as utilities, highways, roads, etc. are expensive and require huge investments. It takes a long time to recover the initial investment even after the completion of the project. This leads to a huge burden on the infrastructure companies in the form of heavy debt and low cash reserves for investment in new projects. The InvIT helps the infrastructure companies in the following manner:
- InvITs offer an alternative to the infrastructure companies to raise cash without increasing debt. They also offer additional funds, which the company can use to repay debts or invest in new projects to grow its portfolio.
- By forming a trust, infrastructure companies can enjoy various tax benefits which are not available for companies. This allows the infrastructure company to have higher post-tax revenue, which can be used for multiple purposes.
Benefits of InvITs
- Regular Income: As InvITs distribute 90% of the income generated as dividends on a bi-monthly basis, they provide you with a steady income.
- Less Risk: InvITs are less volatile than stocks due to low participation and knowledge of the asset by retail investors. This makes it less risky.
- Stable Returns: As 80% of the InvIT money is invested in completed infrastructure projects which are already generating revenue, the returns are stable.
- Diversification: InvITs offer investors an opportunity to diversify their money by investing in a new asset class and become part-owner of an infrastructure project. They help to lower the portfolio risk and generate stable returns in the long run.
- Professional Management: Like Mutual Funds, InvITs are managed by professional managers who are tasked with the responsibility of ensuring optimal returns for investors along with analysis of attractive investment opportunities. This means that the money you have invested in InvIT is in safe hands.
Risks of InvITs
- Low Liquidity: Even though InvITs are listed on the stock exchanges, they have low liquidity due to less investor knowledge of the asset. This makes it difficult to sell the InvIT quickly at the desired price in times of need.
- Fewer Investment Choices: Currently, there are only 3 publicly listed InvITs in India. This does not offer much choice to the investor for making a proper investment decision.
- Regulatory Risks: Any changes in policies concerning taxation or the infrastructure sector will have a huge impact on InvITs. As many InvITs invest in sectors related to public welfare (Highways and Utilities), any delay or failure in regulatory approvals may put the infrastructure project at risk.
- Socio-Political Risks: Any protest by environmentalists against road constructions or similar socio-political problems may pose a risk to the income of the infrastructure project in which InvIT has invested money.
Who should invest in InvITs?
As the minimum investment amount required for InvITs is Rs.10 Lakhs, small retail investors may find it difficult to invest in InvITs. InvITs are a good investment avenue for HNIs who are looking for fixed returns and less volatile assets. Also, InvITs allow you to diversify your portfolio and generate stable returns in the long term.
InvITs in India
Currently, there are 3 listed InvITs in India: IRB InvIT Fund, Power Grid InvIT, and IndiGrid Trust. InvITs are new to the Indian stock markets and the returns they generate in the long term along with investor interest remains to be seen.
As InvITs are listed on the stock exchanges, you can easily purchase them through your Demat account. The minimum trading lot would be Rs. 5 Lakhs. You can also invest in InvITs through Mutual Funds. However, MFs are only allowed to invest a maximum of 5% of their total assets in InvITs, making it difficult to opt for this route.