In News:

• The buzz around the recent bond offer from the National Highway Infrastructure Trust (NHIT) has led to a lot of curiosity about Infrastructure Investment Trusts or InvITs.

What’s in today’s article:

• About InvITs (Meaning, How it works, Use, Risks involved)
• Significance (From India’s perspective, Number of InvITs in India)

What are Infrastructure Investment Trusts (InvITs)?

• An infrastructure investment trust, simply put, is a pooled investment vehicle like a mutual fund.
• While mutual funds invest the sum received in financial securities, an InvIT invests the same in real infrastructure assets like roads, power plants, transmission lines, pipelines etc.
• InvITs are mostly structured as trusts, and an independent trustee holds assets on behalf of unit-holders.

How InvITs work?

• InvITs are designed to mitigate the under-construction risks in the infrastructure sector as at least 80% of the investment must be made in completed and revenue-generating projects.
• The instrument aims to ensure steady predictable cash flows as 90% of the net distributable cash flow gets distributed to the investors.
• These assets have long-term contracts that provide a steady cash flow over the long term-typically 15-20 years, depending on the underlying assets.
• They provide an opportunity to grow by adding more operating projects and increasing the yield.
• Public InvIT units can be listed and traded on a stock exchange like equity stocks.

Use of InvITs:

• InvITs help infrastructure developers to free-up capital by monetising 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.
• Thus, InvITs spur infrastructure creation, by providing an efficient way to raise capital from investors - individual and institutional and fund new project development.
• On the other hand, InvITs offers an opportunity for individual investors to invest into a long term yield instrument in the infrastructure space.
• From the stakeholders' point of view, InvITs proposition for stakeholders involved includes –
  • Developers: Monetize operational assets to free-up capital, and develop new assets.
  • Lenders: Diversify exposure to better quality infrastructure assets with higher ratings.
  • Investors: Earn stable and predictable returns from a portfolio of operational assets.
  • Government: Monetization to create room for further infrastructure development.

Risks of investing in InvITs:

• Operational risk –
  • These include risks due to force majeure events that affect availability of underlying infrastructure projects and have adverse impact on revenues.
• Refinancing risk –
  • Infrastructure projects are predominantly financed through debt.
  • This envisages large bullet repayments and fluctuating interest rates, which may pose a refinancing risk.
• Regulatory risk –
  • Infrastructure is a highly regulated sector in India. Since InvITs are at a nascent stage, the regulations are still evolving.
• Return risk –
  • Since public InvITs are traded on stock exchanges, the unit prices might fluctuate resulting in capital gains or loss as in case of equity stocks.
  • Also, it is important to note that the cash flows of the trust are dependent on the underlying business.

Significance of InvITs from India’s Perspective:

• The Central government had already identified InvITs as a way to attract large institutional long-term investors in infrastructure space.
• The Government’s National Infrastructure Pipeline estimates funding requirements of over $1.4 trillion by 2025.
  • Of this, private sector investment in infrastructure is expected to be at least $325 billion. A large portion of this could come through InvITs.
• To allow for capital recycling and further investments under PPP modes, InvITs play a key role in the monetisation of existing projects in some of these sectors (with conducive regulatory frameworks, cash flow profile, and taxation advantage).
• InvIT helps developers release their invested equity and deploy capital in new projects.
  • This could enable them to address the challenge of projects with high capex demands.
• Another advantage of InvITs for companies is that proceeds raised from such vehicles are not counted as debt.
• Similarly, as the company launching InVIT does not dilute any of its shares in the process, it does not count as equity either.

How many InvITs are there today and how much have they raised so far?

• At present, 15 InvITs are registered with SEBI, and seven are listed on the stock exchanges. The market cap of the listed InvITs is over $10 billion.
• A total of ₹21,195 crore was collected through InvITs in 2021-22. This included money collected by unlisted InvITs.
• The funds were raised through initial offer, preferential issue, institutional placement and rights issue.