Infrastructure investment trust(InvIT) is an investment vehicle in which the investments from individuals and institutional investors are pooled and are invested in infrastructure projects. It operates similar to mutual funds and Real estate investment trust (REIT) where investors purchase units of the InvITs. InvITs similar to REITs provide distribution payments to unitholders (investors) periodically. The InvIT basically owns, operates income-generating real estate assets and it invests in a wide range of real estates such as utilities, road construction, airports, shipping ports, etc. InvIT has to distribute 90 % of its net cash flows to investors.
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InvIT structure and how it works:
The structure of InvIT is also very similar to mutual funds and REIT; it has a tiered structure composed of:
Sponsor: As defined by SEBI “is a company, limited liability partnership or body corporate, which is the settlor and author of the trust and designated as the ‘sponsor’ of an InvIT”. Basically, the role of the sponsor is to set up the InvIT (as a Trust) and appoint the trustee post-execution of an indenture of Trust, The sponsor will also transfer the initial portfolio of assets to the InvIT after setting it up.
SEBI has also set up a rule framework for the sponsor of an InvIT, they are;
- The number of sponsors for an InvIT cannot exceed 3 (three).
- The net worth of at least Rs. 100 crs in case of a body corporate or a company or net tangible assets of Rs.100 crs in case of a limited liability partnership.
- Minimum experience of at least 5 (five) years and has completed at least two projects.
- The consolidated number of units held by the sponsor shall not be less than 15%.
Trustee: A trustee is resisted with SEBI and is basically the entity that holds the assets of the InvIT, in trust for the benefit of the unitholders. The trustee is appointed by the sponsor and this role is overseeing the activities of the Investment Manager and the Project Manager, ensuring compliance with the SEBI InvIT Regulations, entering into agreements on behalf of the InvIT, declaring distributions by the InvIT, and reviewing any investor complaints.
SEBI has also set up a rule framework for a Trustee of an InvIT, they are;
- A trustee should be registered with SEBI.
- Should not be an associate of the sponsor or investment manager.
- Should have sufficient resources with respect to infrastructure, personnel, etc. as specified by SEBI.
Investment manager: The trustee appoints the Investment manager to manage the assets and investments of the InvIT. The investment manager is basically responsible for undertaking investment decisions on behalf of the InvIT, managing the InvIT assets, undertaking or initiating activities related to the general functioning of the InvIT (such as unitholder meetings, unitholder grievance remedy, issuance of capital by an InvIT) and ensuring on-going compliance with the SEBI InvIT Regulations.
SEBI has also set up a rule framework for an Investment manager of an InvIT, they are;
- The net worth of at least Rs. 10 crs in case of a body corporate or a company or net tangible assets of Rs. 10 crs in case of a limited liability partnership.
- Minimum experience of 5 years in fund management or advisory services or development in the infrastructure sector.
- The investment manager needs to have a minimum of two employees who have at least 5 (five) years of experience in fund management or advisory services or development in the infrastructure sector.
- The investment manager needs to have a minimum of one employee having at least 5 (five) years of experience in the relevant sub-sector in which the InvIT has invested or proposes to invest.
Project manager: The trustee also appoints the Project manager to undertake the operations and maintenance of the InvIT assets. The project manager is basically responsible for achieving execution of the project and in the case of PPP projects, it indicates that the entity is responsible for such execution and achievement of project milestones following the concession agreement or any other relevant project document.
InvITs help infrastructure developers to free-up capital by monetizing completed assets. The infrastructure developer can transfer a part of its revenue-generating assets to an InvIT, which can then issue units to its holders. The InvITs use these long-term revenue-generating infrastructure assets, in turn, generate cash flows, which are then distributed to the unit holders periodically.
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Benefits and risks of investing in InvITs:
Firstly, let’s look at the benefits of investing in InvITs:
- Stable long-term cash flow: Minimum of 90% revenue generated from the investments made by the trust has to be methodically distributed among investors in the form of dividends semi-annually making them ideal for long-term steady cash flow-seeking investors.
- Relatively low risk: InvITs are well regulated by SEBI and must invest at least 80% of their assets in projects that are completed and revenue-generating. InvITs cannot invest more than 10% of their assets in under-construction projects and this lowers the risk for investors as this reduces one of the biggest risks associated with the infrastructure sector i.e. delay in completion.
- Liquidity: Since InvITs are listed and traded on the exchange, investors are able to buy and sell the units of InvITs similar to equity investments making them highly liquid without any lock-in period.
- Tax Benefit: Dividend received by the InvIT and the unit holders from SPVs are not to be taxable in the hands of the InvIT or unit holders If the SPV has not opted for the concessional corporate tax rate. InvITs enjoy a concessional long-term capital gains tax rate (like in equity) if the units are held for over three years.
And now some of the risks:
- Business risk: One of the biggest risks to InvITs is one linked to operations i.e. a sharp slowdown or drop in revenues that could impact gains.
- Volatility: Since public InvITs are traded on stock exchanges, the unit prices might fluctuate resulting in capital gains or losses similar to other stocks.
- Regulatory risks: Even though the InvITs are subject to strict regulatory compliance, it is still in a nascent stage and the rules are still evolving.
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The infrastructure sector is a key driver for any economy. Indians usually have most of their net worth accumulated in real estate and the InvITs provide them with a new avenue to further diversify their portfolio in the real estate sector. The most important thing is the government is very bullish on InvITs as it opens a new way to raise money for infra projects and the regulators have provided several incentives like tax benefits to boost investments in InvITs. But since the InvIT space is still evolving, investors can wait and watch how this investment opportunity unfolds.
This article should not be construed as investment advise, please consult your Investment Adviser before making any sound investment decision. If you do not have one visit mymoneysage.in
Also read: REIT’s: Real Estate Investment Trusts