There are two sectors that play an important role in any emerging economy, the infrastructure sector, and real estate. A well-established infrastructural setup can boost a country’s overall development. Therefore, it is crucial to have a robust infrastructure to facilitate a continued influx of foreign investments and private equity.
This inflow of funds can help in expanding the country’s capital base and allow the growth of its crucial sectors. To facilitate the inflow of funds, there are financial instruments called infrastructure investment trusts. Here, we will learn more about this concept and how it can help a country’s infrastructural set-up as well as the economy.
What is an infrastructure investment trust (InvIT)?
Infrastructure investment trusts are a form of investment instrument that is similar to a mutual fund. This investment form is regulated by the Securities and Exchange Board of India. Also known as InvITs, the units of these trusts are listed on various trading platforms, such as stock exchanges. InviTs are a combination of equity and debt instruments.
InvITs are established to encourage investors to invest in the infrastructure sector. These investment forms pool money from several investors and invest in income-generating assets. The cash flow is then distributed among investors in the form of dividend income. When compared to Real Estate Investment Trust or REITs, the structure and operation of Real Estate Investment Trust or REITs is similar to InviTs.
How are InvITs structured?
InvITs allow individual investors to invest in infrastructure projects in two main ways. This could be either direct investment or through special purpose vehicles. Here are the two commonly available categories of InviTs:
- Investment in revenue-generating projects –
This type allows investors to pick revenue-generating finished projects through a public offering.
- Investment in projects under construction –
This type of investment uses private placement of units. Here, investors can invest in projects under construction or those that are finished.
How do InvITs work?
Before investing in InviTs, investors must know how these trusts work. Some of the common characteristics of InviTs are as below:
- InvITs must distribute 90% of net cash flows to investors. A leverage of 49% is placed on the net asset value of these trusts.
- InvITs are also mandated to regularly distribute dividends depending on their earnings. These dividends should be distributed once in six months.
- For InviTs that are publicly placed or under construction assets, there is a cap on the maximum exposure. Sponsors who set-up the InvITs are accountable for the appointment of trustees.
- The sponsor must hold at least 15% of the total units of an InvIT. The lock-in period of these is three years calculated from the date of issuance.
- Companies must maintain specific investment ratios, like 80% of total investments should be in completed and revenue-generating assets.
- These are slightly expensive investment avenues as minimum investment is pegged at Rs. 1 lakh per investor.
Understanding the structure of InvITs
An InvIT is established as a trust and is registered with the SEBI. Typically, infrastructure investment trust SEBI comprises 4 elements, namely –
- Trustee:They are required to be registered with SEBI as debenture trustees. Also, they are required to invest at least 80% into infra assets that generate steady revenue.
- Sponsor: Typically, a body corporate, LLP, promoter or a company with a net worth of at least Rs. 100 crore classifies as a sponsor. Further, they must hold at least 15% of the total InvITs with a minimum lock-in period of 3 years or as notified by any regulatory requirement. When it comes to a public-private partnership or PPP projects, sponsors serve as a Special Purpose Vehicle (SPV).
- Investment manager: As a body corporate of LLP, an investment manager supervises all the operational activities surrounding InvITs.
- Project manager: The authority is mostly responsible for executing projects. However, in the case of PPP projects, it serves as an entity that also supervises ancillary responsibilities.
Taxation on Infrastructure Investment Trusts
InvITs have two types of returns for investors – Dividend Income and Capital Gains. Here is the tax treatment of each of these incomes:
- Tax on Dividend and Interest Income: Any dividend or interest income from an InvIT investment is taxable as per individual Income Tax Slab rate. Investors must declare this income every year while filing Income Tax Return.
- Tax on Capital Gains: Capital Gains tax is applicable only if an investor sells InvITs units. Income through sale of InvITs units held for up to 3 years falls under Short Term Capital Gains (STCG) tax @ 15%. Sale of InvITs units held for over 3 years are subject to Long Term Capital Gains (LTCG) tax @ 10% if the income exceeds Rs. 1 lakh.
Benefits of InvITs
The following points highlight some of the main benefits of infrastructure trusts:
- Portfolio diversification
InvITs offer investors an opportunity to diversify their investment portfolio. Through investments in InviTs, investors can reduce the overall portfolio risk and have better chances of generating steady returns in the long run.
- Accrues fixed income
This investment avenue can be ideal for those who are planning or nearing retirement, as it helps to generate fixed income in the long run. An infrastructure investment trust is mandated to distribute 90% of its periodic net cash flow to its investors. This is how investors can fetch steady earnings during the course of investment. Apart from this, investors may also receive dividend income in case the InvITs generate surplus cash flow.
Investors can enjoy liquidity benefits through this investment as it is easier to enter or exit InvITs. However, it could be challenging for small investors to exit a high-valued property within a short time span.
- Quality asset management
Investors can get their assets professionally managed by investing in InviTs. This can allow effective management and appropriate resource allocation.
Risks involved in InvITs
While investors can benefit through InvITs, they may also be exposed to certain risks that are specific to such investments. The following are some of the commonly observed risks of these investment vehicles:
The smallest change in a regulatory framework, such as taxation or policy changes related to the infrastructure sector, can have a significant impact on InvITs.
High inflation may have a significant impact on an infrastructure investment trust’s performance, specifically increasing its operating cost. Higher toll rates could lower the chances of generating substantial returns through these investments.
Infrastructure investments generally have a long gestation period. Therefore, the process of generating returns may often be delayed. Such delays can impact cash flow and thereby profit projections.
Who should invest in InvITs?
Just like stock investment, InvITs also get listed on exchanges through IPO. The minimum amount required to invest in these is Rs. 1 lakhs. Therefore, small investors may find it difficult to invest directly in InvITs through IPOs. High net worth institutions, individuals, etc. often prefer infrastructure investment trusts, since these are considered as a profitable investment option because of the quantum of investment and prospect of generating returns.
How to invest in InvITs?
Units of InvITs are listed on the stock exchange just like stocks and ETFs. For investors who would like to purchase units of InviTs on the stock market, the first step is to open a Demat Account. Retail investors can currently purchase units of the India Grid Trust or the IRB InvIT Fund that are listed on the stock market.
Investors can also invest in InvITs through mutual funds. However, individual mutual funds are only permitted to invest up to 5% of their total assets in alternative investment funds such as InvITs.
Investors who do not want to bet big on InviTs may invest in these through the secondary market to ensure exposure to this sector within their portfolio. However, it is important to have sufficient knowledge of the sector performance and market conditions before making an investment in InvITs.
- What are infrastructure investment trusts?
InvITs are similar to a mutual fund since these pool money from individual and institutional investors to fund infrastructure projects. Investors can earn a small portion of the project’s income as a return.
- What is the minimum investment requirement in InviTs?
The minimum amount required to be invested in an InviT IPO is Rs. 1 lakh as per the latest SEBI guidelines released in 2020.
- What is the difference between REITs and InviTs?
REITs or Real Estate Investment Trusts and InviTs are similar since both functions as a mutual fund investment. However, REITs focus on real estate such as commercial property, the renting and leasing of which generates income for the trust. InviTs invest in projects related to roads, pipelines, power plants, highways, etc.
- Is it safe to invest in InviTs?
Investors must know the basics of how these trusts function before investing in them. It is also important to have some basic understanding of the infrastructure sector and market conditions in general.
- Do InvITs allow the benefit of liquidity to investors?
InviTs allow liquidity to investors through regular steady income distribution. Some trusts may also declare dividends from time to time, depending on the income generated.