Infrastructure Investment Trusts (InvITs): Significance & Challenges

Infrastructure Investment Trusts (InvITs) in India have emerged as a crucial financing mechanism for infrastructure projects, pooling funds from both retail and institutional investors. Recent developments include IndoSpace’s plan to launch the largest InvIT in India’s industrial and logistics sector, aiming to raise $700-800 million. Regulatory amendments by SEBI have further refined the framework, enhancing corporate governance and flexibility, making InvITs an increasingly attractive investment vehicle.

What are InvITs?

Structure and Working of InvITs

Infrastructure Investment Trusts (InvITs) are investment vehicles designed to pool funds from various investors to invest in income-generating infrastructure assets. They function similarly to mutual funds but focus on infrastructure projects such as roads, highways, power transmission lines, and telecom towers. Here is a detailed breakdown of their structure and working:

Parties Involved

• Sponsor: The sponsor is typically an infrastructure development company or a private equity firm that sets up the InvIT. The sponsor identifies suitable projects and transfers ownership of these assets to the trust. The sponsor must hold a minimum of 15% of the total units of the InvIT on a post-issue basis for at least three years from the date of listing.
• Trustee: The trustee is an independent entity responsible for holding the assets of the InvIT in trust for the benefit of the unitholders. The trustee ensures compliance with SEBI regulations and oversees the activities of the investment manager and project manager.
• Investment Manager: The investment manager is responsible for managing the InvIT’s assets and operations. This includes making investment decisions, managing day-to-day activities, and ensuring the optimal performance of the InvIT’s portfolio.
• Project Manager: The project manager is tasked with the execution and management of the infrastructure projects. This includes overseeing the construction, operation, and maintenance of the assets held by the InvIT.

Pooling of Funds from Investors

InvITs pool money from both retail and institutional investors. These funds are then invested in infrastructure projects that generate regular income. The pooled funds allow for the acquisition and management of large-scale infrastructure assets, which individual investors might not be able to invest in directly.

Investment in Infrastructure Assets

InvITs invest in a diversified portfolio of infrastructure assets. These assets can be either completed projects that generate steady cash flows or under-construction projects that have the potential to generate income in the future. SEBI regulations mandate that at least 80% of the total assets of an InvIT must be invested in completed and income-generating infrastructure projects.

Distribution of Income to Unitholders

One of the key features of InvITs is the distribution of income to unitholders. InvITs are required to distribute at least 90% of their net distributable cash flows to unitholders. This income can come from dividends, interest, and capital gains generated by the underlying infrastructure assets.

Regulatory Framework: SEBI (Infrastructure Investment Trusts) Regulations, 2014

The Securities and Exchange Board of India (SEBI) introduced the SEBI (Infrastructure Investment Trusts) Regulations, 2014 to govern the formation and operation of InvITs. These regulations provide a comprehensive framework for the registration, management, and functioning of InvITs, ensuring transparency, accountability, and protection of investor interests.

Eligibility Criteria for Various Parties

SEBI has laid down specific eligibility criteria for the key parties involved in an InvIT:

• Sponsor:
  • Must have a net worth of at least INR 100 crore (approximately USD 15.38 million) if it is a body corporate or company.
  • Must have a minimum of five years of experience in infrastructure development or fund management.
  • Must hold at least 15% of the total units of the InvIT on a post-issue basis for a minimum of three years.
• Trustee:
  • Must be registered with SEBI as a debenture trustee.
  • Must not be an associate of the sponsor or the investment manager.
  • Responsible for ensuring compliance with SEBI regulations and safeguarding the interests of unitholders.
• Investment Manager:
  • Must have a net worth of at least INR 10 crore (approximately USD 1.54 million).
  • Must have a minimum of five years of experience in fund management, advisory services, or infrastructure development.
  • Must have at least two employees with a minimum of five years of experience in fund management or advisory services.
  • Must have an office in India from where the operations of the InvIT are conducted.
• Project Manager:
  • Responsible for the execution and management of the infrastructure projects.
  • Must ensure that the projects meet the required standards and milestones as per the project documents or concession agreements.

By adhering to these regulations and eligibility criteria, InvITs provide a structured and regulated avenue for investment in India’s infrastructure sector, offering both stability and growth potential to investors.

Benefits of InvITs

Stable and Predictable Income Streams

• InvITs invest in operational and revenue-generating infrastructure assets like toll roads, power transmission lines, and pipelines, which provide a steady stream of cash flows through long-term contracts or regulatory mechanisms.
• These stable income streams can offer investors a reliable source of returns over time, making InvITs an attractive investment option for those seeking regular income distributions.

Portfolio Diversification

• By investing in InvITs, investors can gain exposure to a diversified portfolio of infrastructure assets, which have low correlation with traditional asset classes like equities and bonds.
• This diversification can help reduce overall portfolio risk and potentially enhance risk-adjusted returns for investors.

Professional Management

• InvITs are managed by professional investment managers who possess expertise in infrastructure investments, ensuring efficient operations, maintenance, and capital deployment of the underlying assets.
• Investors can benefit from the knowledge and experience of these professionals, allowing them to access high-quality infrastructure assets and specialized management capabilities.

Potential for Capital Appreciation

• In addition to regular income distributions, InvITs offer the potential for capital appreciation as the underlying infrastructure projects mature and generate income over time.
• The value of the assets held by the InvIT may increase, leading to an increase in the unit price and providing investors with capital gains.

Liquidity and Accessibility

• InvITs are listed on stock exchanges, providing liquidity and allowing investors to easily buy and sell units, unlike direct investments in infrastructure projects.
• This accessibility enables both retail and institutional investors to participate in the infrastructure sector, which was traditionally available only to larger investors or government entities.

Regulatory Oversight and Transparency

• InvITs are regulated by the Securities and Exchange Board of India (SEBI) and are subject to stringent disclosure requirements and corporate governance standards.
• Regular reporting, audits, and adherence to regulatory norms contribute to increased transparency and accountability, enhancing investor confidence in the operations and financial performance of the InvIT.

Inflation Hedge

• Infrastructure assets often have revenue streams linked to inflation or price escalation clauses, providing a natural hedge against inflation.
• As the income generated by these assets tends to increase with inflation, investors can potentially preserve their purchasing power over the long term.

Growth of InvITs in India

Timeline of Key Developments and Regulatory Changes

• 2014: Introduction of the SEBI (Infrastructure Investment Trusts) Regulations, establishing the regulatory framework for InvITs in India.
• 2017: Listing of the first InvITs, IRB InvIT and India Grid Trust, marking the operational commencement of InvITs in the Indian market.
• 2023: Amendments to the regulatory framework focusing on corporate governance and management aspects of InvITs, enhancing investor protection and governance norms for privately placed InvITs.

Major InvITs Launched in India Across Sectors

• Roads:
  • IRB InvIT Fund, focusing on road and highway projects, became one of the first to be listed.
  • Indinfravit Trust, sponsored by L&T IDPL, invests in road infrastructure.
• Power Transmission:
  • India Grid Trust (IndiGrid), sponsored by Sterlite Power Transmission Limited, focuses on power transmission assets.
  • PowerGrid InvIT, sponsored by the Power Grid Corporation of India, invests in power transmission projects.
• Gas Pipeline:
  • India Infrastructure Trust, sponsored by Brookfield, invests in gas pipeline infrastructure.

Funds Raised Through InvITs

• FY 2021-22: InvITs raised a total equity of Rs. 550 Billion in FY 2021 and Rs. 220 Billion in FY 2022, showcasing significant growth in funds mobilization through these instruments.
• FY 2023-24: A record Rs 17,116 crore was raised by InvITs and REITs, indicating a substantial increase in fundraising activities.

Participation of Institutional Investors (Domestic and Foreign)

• Domestic Institutional Investors: State Bank of India, SBI Pension Fund, and SBI Mutual Fund have shown active participation in InvITs, indicating strong domestic institutional interest.
• Foreign Institutional Investors: The Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan Board have been notable foreign investors, subscribing to significant stakes in InvIT rounds, highlighting the global confidence in Indian infrastructure through InvITs.

Investment Opportunities in InvITs

Sectors Eligible for Investment

• Infrastructure Investment Trusts (InvITs) can invest in a wide range of sectors as defined under the Harmonized Master List of Infrastructure Sub-sectors. This includes roads, power transmission (including gas pipelines), and tower transmission, among others.

Prominent InvITs and Their Asset Portfolios

• IRB InvIT Fund: Focuses on road assets, managing a portfolio that includes 6 highway assets, comprising both BOT (Build-Operate-Transfer) and HAM (Hybrid Annuity Model) assets. The enterprise value of these assets is reported to be Rs.8,244 Crores.
• PowerGrid InvIT: Specializes in power transmission assets. It owns, constructs, operates, maintains, and invests in power transmission assets across India. PowerGrid InvIT was registered with SEBI as an InvIT on January 7, 2021.
• India Grid Trust: India’s first listed power sector infrastructure investment trust, focusing on power transmission assets. It manages a portfolio that includes a total circuit length of approximately 7,790 cKms across 42 transmission lines and 14,550 MVA across 12 substations.
• Upcoming InvITs: There are opportunities in sectors such as renewable energy and ports, indicating a broadening scope for InvIT investments in India.

Comparative Analysis of Different InvITs

InvIT Name	Sector Focus	Returns (%)	Risks	Growth Prospects
IRB InvIT Fund	Roads	Varied	Low to Medium	High, with government push for infrastructure
PowerGrid InvIT	Power Transmission	Stable	Low	Significant, with ongoing and upcoming projects
India Grid Trust	Power Transmission	Stable	Low	High, due to increasing demand for power and renewable energy integration
Upcoming InvITs	Renewable Energy, Ports	Expected to be Competitive	Medium to High	Very High, with government’s focus on renewable energy and port development

Challenges and Risks

Regulatory and Policy Uncertainties

• Evolving Regulatory Framework: Since their inception, InvIT regulations have undergone significant changes, reflecting an evolving regulatory landscape that can introduce uncertainties for investors and managers.
• Taxation and Legal Framework: Discrepancies in tax treatment between InvITs and other investment vehicles, such as the difference in long-term capital gains (LTCG) taxation rules, pose challenges and may deter investor participation.

Market and Operational Risks

• Overvaluation Risks: There is a risk of overvaluation during the Initial Public Offering (IPO) phase, which can affect investor returns and trust in the InvIT market.
• Asset Performance: The performance of InvITs is closely tied to the operational success of the underlying infrastructure assets. Any operational failures or inefficiencies can directly impact returns.
• Liquidity Risks: Despite being listed, some InvITs may face liquidity challenges, making it difficult for investors to exit at their desired time or price.

Financial and Credit Risks

• Leverage and Borrowing Restrictions: InvITs are subject to borrowing restrictions, which, while intended to mitigate risk, can limit their ability to leverage and expand.
• Credit Rating Challenges: Securing a high credit rating can be challenging for InvITs, especially those with assets backed by entities with weaker financial profiles. This can affect the trust’s ability to raise funds.

External and Environmental Risks

• Global Pandemic Impact: The COVID-19 pandemic has severely affected the real estate and infrastructure sectors, leading to reduced demand for office and commercial spaces, thereby impacting InvITs focused on these areas.
• Interest Rate Fluctuations: Rising interest rates can make the yields on InvITs less attractive compared to other investment options, potentially reducing demand.

Governance and Management Risks

• Management and Governance: The experience and track record of the trustee, investment manager, and project manager play a crucial role in the success of an InvIT. Poor management or governance can lead to suboptimal asset performance and investor dissatisfaction.
• Sponsor’s Role and Stability: The stability and financial health of the sponsor are critical for the trust’s success. Any negative developments related to the sponsor can adversely affect the InvIT.

Sector-Specific Challenges

• Renewable Sector Pipeline: For InvITs looking to invest in the renewable energy sector, a lack of available project pipelines for monetization poses a significant challenge.
• Public Sector Bank Skepticism: Some public sector banks remain skeptical about lending to InvITs, particularly at the trust level, which can limit the financing options available for these investment vehicles.

Future Outlook and Opportunities

Government Initiatives and Policy Support

• National Monetization Pipeline (NMP): The NMP aims to unlock value from brownfield infrastructure assets by engaging the private sector and transferring revenue rights, but not ownership, to them for a specified period. It provides a clear framework for asset monetization and a ready list of assets to generate investor interest, with an estimated monetization potential of Rs. 6 lakh crore through core assets of the Central Government over four years (FY 2022-2025).
• National Infrastructure Pipeline (NIP): The NIP aims to facilitate infrastructure investments across various sectors, including economic and social infrastructure projects. It consists of over 6,800 projects with a total project cost of over Rs. 100 crore each, collated from state governments and private infrastructure companies. The NIP is expected to create jobs, improve ease of living, and provide equitable access to infrastructure, making growth more inclusive.
• Harmonized Master List (HML) of Infrastructure Sub-sectors: The HML includes 37 infrastructure sub-sectors eligible for investment through various instruments like InvITs. It aims to provide a comprehensive list of infrastructure sectors to facilitate investment and financing through instruments like InvITs and other public-private partnership (PPP) models.
• Promoting Public-Private Partnerships (PPPs): The government has expanded the Viability Gap Funding (VGF) Scheme to promote PPPs in infrastructure development. The Infrastructure Investment Project Development Fund (IIPDF) has been revamped to provide financial support for project development activities. Initiatives like the National Monetization Pipeline (NMP) and the National Infrastructure Pipeline (NIP) are expected to boost private sector participation in infrastructure projects through PPPs and InvITs.

Potential for InvITs in New Sectors

• Renewable Energy: The renewable energy sector, including solar, wind, and green hydrogen projects, presents significant opportunities for InvITs as India transitions towards a low-carbon economy. The government’s focus on promoting renewable energy and sustainable practices is expected to drive growth in this sector.
• Ports and Airports: Ports and airports are emerging as potential sectors for InvIT investments, with the government’s emphasis on modernizing and expanding these infrastructure assets. The success of InvITs in the road sector has prompted the government to consider their application for ports and airports as well.
• Telecom Sector: The telecom sector, with its growing demand for tower infrastructure and the rollout of 5G networks, could witness increased InvIT activity in the future. The need for robust telecom infrastructure to support digital connectivity and data consumption is expected to drive investments in this sector.

Increasing Participation of Institutional Investors

• Domestic Institutional Investors: Regulatory changes and the successful performance of existing InvITs have attracted domestic institutional investors like insurance companies, pension funds, and mutual funds to participate in these investment vehicles. This growing interest from domestic institutions is expected to provide a stable source of capital for InvITs.
• Foreign Institutional Investors: There is a growing interest from foreign institutional investors and sovereign wealth funds in investing in Indian InvITs, driven by the country’s infrastructure growth potential and stable returns offered by these instruments. The participation of global investors is expected to enhance the credibility and attractiveness of InvITs in India.

Bridging India’s Infrastructure Financing Gap

• Alternative Financing Source: InvITs are expected to play a pivotal role in bridging India’s infrastructure financing gap, estimated to be over 5% of GDP, by providing an alternative source of funding for infrastructure projects. The ability of InvITs to attract long-term capital from a diverse investor base is crucial for meeting the country’s infrastructure development needs.
• Asset Monetization: The government’s focus on asset monetization through InvITs can help unlock capital for infrastructure developers, enabling them to reinvest in new projects and accelerate infrastructure development. This approach is expected to enhance the efficiency of capital allocation and promote sustainable infrastructure growth.

Enhancing Investor Confidence and Market Depth

• Regulatory Enhancements: Continuous efforts by regulators like SEBI to strengthen the regulatory framework, enhance corporate governance norms, and improve disclosure requirements can further boost investor confidence in InvITs. These measures are aimed at ensuring transparency, accountability, and protection of investor interests.
• Investor Awareness: Increasing investor awareness and understanding of InvITs through educational initiatives and successful case studies can deepen the market and attract a broader range of investors. Efforts to educate investors about the benefits and risks associated with InvITs are essential for fostering a mature investment environment.
• New Investment Products: The introduction of new investment products, such as exchange-traded funds (ETFs) based on InvITs, could improve liquidity and accessibility for retail investors. These products can provide a convenient and cost-effective way for investors to gain exposure to infrastructure assets.

Conclusion

Infrastructure Investment Trusts (InvITs) have significantly transformed India’s infrastructure financing landscape, offering a symbiotic platform for investors and developers alike. By enabling direct investment in large-scale infrastructure projects, InvITs not only facilitate the mobilization of long-term capital but also ensure stable returns for investors. With regulatory support from SEBI and the government’s initiatives like the National Monetization Pipeline, InvITs are poised for substantial growth, promising to bridge India’s infrastructure gap while providing attractive investment opportunities. The evolution of InvITs underscores their potential to drive sustainable infrastructure development and economic growth in India.

Practice Question

Discuss the role of Infrastructure Investment Trusts (InvITs) in bridging India’s infrastructure financing gap and their potential impact on economic growth. (250 words)