New route to investing in Indian infrastructure.

MAULIK MADHU : Retail investors have to put in at least ₹10 lakh in InvIT, but there is no lock-in period

Scouting for new investment options? Here’s one to consider — infrastructure investment trusts (InvITs). Last month, the Securities and Exchange Board of India (SEBI) set the ball rolling for InvITs, nearly two years after it came out with regulations on them.

It gave the go ahead to IRB Infrastructure Developers, GMR and MEP Infrastructure to raise funds through InvITs. IRB InvIT Fund became the first one to file a draft red herring prospectus for an initial public offering of ₹4,300 crore.

Simply put, an InvIT is a trust created by a sponsor (IRB Infrastructure Developers, for instance) that will raise funds for investing in and/or lending to its infrastructure projects. An InvIT will raise money by issuing units to individual and institutional investors, which will be listed on the stock exchanges.

The money raised by an InvIT can be extended to the project SPVs (special purpose vehicle) or the project directly either by way of equity or loan.

With InvITs extending money to the SPVs for paying off some of their existing project debt, they will facilitate de-leveraging of the Indian infrastructure sector. They will also help free up developers’ capital tied in completed projects for deployment in other upcoming ones.

How it works for investors

To begin with, the minimum investment requirement of ₹10 lakh for individuals in case of publicly offered InvITs makes them an option only for wealthy investors. There is no minimum lock-in period for the investment.

According to Maadhav Poddar, Tax Partner, Real Estate Practice, EY, InvITs offer investors the opportunity to earn regular returns as is the case with corporate bonds and fixed deposits, with the added possibility of an upside on equity (capital gains).

While a unit holder has to pay tax on the capital gains made on the InvIT units sold by him, taxation of the regular payouts received by him from the InvIT will depend on the type of income.

Short-term (less than 36 months) capital gains made by a unit holder on the sale of InvIT units on the exchanges will be taxed at 15 per cent and long-term capital gains will be tax exempt.

For off-the-exchange transactions, short-term and long-term capital gains will be taxed at 40 per cent and 20 per cent respectively.

Dividends, if any, earned by an InvIT on its equity stake in project SPVs will be distributed to the unit holders as dividend income. It will be likewise for the interest earned by an InvIT in return for the loans extended by it to the project SPVs.

But, while dividends will be tax exempt, interest income will be taxed at the unit holder’s applicable income tax slab rate.

Apart from that, the revenue generated by the projects included under the InvIT will be treated as dividend income (tax-exempt) for distribution to the unit holders. InvITs have been mandated to distribute not less than 90 per cent of their net distributable cash flows to their unit holders.

This has to be done not less than once every six months in a financial year in case of publicly offered InvtITs.

Additionally, if the proceeds from the sale of any infrastructure asset by an InvIT or an SPV are not invested into another infrastructure asset, then these too have to be distributed to the unit holders. Any capital gain, made by the InvIT on such a sale that is distributed to the unit holders will not be taxed.

But, given that InvITs are a new product, one will have to wait and see how these products get structured, how they work on the ground and what the actual returns will be. That said, you must evaluate the quality of the underlying assets (projects SPVs included in the InvIT) and the credibility of the investment manager before investing.

It is also worth mentioning that given the many investor safeguards in the SEBI 2014 regulations, experts feel that the risk quotient of InvITs may not be very high.

Adequate protection 

According to these regulations, a public InvIT has to invest at least 80 per cent of the value of its assets in completed infrastructure projects that have been generating revenue for at least a year.

This is to shield investors from construction risk and protect their investment from getting stuck in stranded projects.

Besides, a sponsor has to fulfil some pre-conditions for getting a certificate of registration for its InvIT from the SEBI.

A sponsor must have networth of at least ₹100 crore (in case it’s a company), have at least five years’ experience and a minimum of two completed projects.

To ensure the sponsor/s too has his skin in the game, the SEBI regulations stipulate that the sponsor/s must hold not less than 25 per cent of the units for not less than three years from the listing date.

Listing of the InvIT units on an exchange and periodic disclosures are meant to serve as other important safeguards