Capital Markets: Challenges and Developments

What is Infrastructure Investment Trusts (InvITs)?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : REITs, INVITs

Mains level : Not Much

The National Highways Authority of India (NHAI) has come up with its Infrastructure Investment Trust (InvIT) issue.

Try this PYQ:

Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

(a) Certificate of Deposit

(b) Commercial Paper

(c) Promissory Note

(d) Participatory Note

Significance of the issue

  • The issue will enable NHAI to monetize its completed National Highways that have a toll collection track record of at least one year.
  • The NHAI reserves the right to levy a toll on identified highways and it will help the company raise funds for more road development across the country.

What are InvITs?

  • Infrastructure investment trusts are institutions similar to mutual funds, which pool investment from various categories of investors and invest them into completed and revenue-generating infrastructure projects, thereby creating returns for the investor.
  • Structured like mutual funds, they have a trustee, sponsor(s), investment manager and project manager.
  • While the trustee (certified by Sebi) has the responsibility of inspecting the performance of an InvIT, sponsor(s) are promoters of the company that set up the InvIT.
  • In the case of Public-private partnership (PPP) projects, it refers to the infrastructure developer or a special purpose vehicle holding the concession.
  • While the investment manager is entrusted with the task of supervising the assets and investments of the InvIT, the project manager is responsible for the execution of the project.

How will it work for NHAI?

  • NHAI’s InvIT will be a Trust established by NHAI under the Indian Trust Act, 1882 and SEBI regulations.
  • The InvIT Trust will be formed the objective of investing primarily in infrastructure projects.
  • The fund raised can be invested in the project SPVs by way of an issue of debt.
  • The trust can utilise it to repay their loans or even for prepayment of certain unsecured loans and advances.

Why does NHAI need fund?

  • At a time when private sector investment in the economy has declined, fund-raising by NHAI and spending on infrastructure will not only provide a fillip to the economy but will also crowd-in private sector investment.
  • So NHAI’s InvIT offer is a way for the government to tap alternative sources of financing to boost public spending in the roads and infrastructure sector.
  • It is important to note that in October 2017, the Centre had launched Bharatmala Pariyojana, its flagship highway development programme, for development of 24,800 km of roads.
  • In order to complete the projects, NHAI needs adequate funds and one of the options is to monetize the completed and operational NH assets.

How does it benefit the investor?

  • Retail or even large financial investors may not be typically able to invest in infrastructure projects such as roads, power, energy etc.
  • InvITs enable these investors to buy a small portion of the units being sold by the fund depending upon their risk appetite.
  • Given that such trusts comprise largely of completed and operational projects with positive cash flow, the risks are somewhat contained.
  • The investors can benefit from the cash flow that gets distributed as well as in capital appreciation of the units.
  • Unitholders also benefit from favourable tax norms, including exemption on dividend income and no capital gains tax if units are held for more than three years.
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