Thus far, it’s regrets only as far as these InvITs go
Well begun is half done. But the adage certainly isn’t true for India’s experience this far with infrastructure investment trusts (InvITs). IRB InvIT Fund, the first to hit the market, was hugely subscribed, while demand was far more sober for the second issue by India Grid Trust. IRB InvIT Fund’s muted listing affected India Grid Trust’s performance, said an investment banker who did not want to be named. More importantly, both instruments are trading below their issue price (see table above).
Of course, it’s naive to expect a listing pop with InvITs like stocks; after all, they are hybrid instruments and not pure equity. Sumit Jalan, managing director and co-head of India investment banking and capital markets at Credit Suisse, explains: “The InvIT instrument is closer to debt than to equity. I would say an equity investor is looking for medium risk and high return whereas the InvIT product is low risk with medium return. Bond investors are in the low risk/low return category. InvITs are attractive on a risk-adjusted basis and are better suited to longer term, patient capital rather than ‘hot money’.”
As such, investors may still be grappling with the risk-return profile of these relatively new instruments, which could well have contributed to the lukewarm response post-listing. IRB’s poor show on listing also affected India Grid Trust’s pricing—the estimated returns on its units work out to be lower than that of IRB InvIT Fund. In general, it is also possible that the minimum investment limit of Rs10 lakh may have acted as a deterrent for non-institutional participation.
Also, InvITs are not without risks. An InvIT is sensitive to interest rates. Most investors compare the yield of InvITs to the yield of other asset classes such as government bonds, corporate bonds and savings deposit rates, point out analysts from Bank of America Merrill Lynch in a report on 20 June. “A rise in interest rates could reduce the spread between the yield of InvITs and these other asset classes,” they say in the note to clients.
In other words, a rise in interest rates could impact the valuations/ price of InvIT/REIT (real estate investment trust). Further, returns are linked to the performance of the underlying infrastructure assets. For instance: let’s say the underlying assets of an InvIT fund is a toll road project and it fails to meet its projected revenues due to weaker traffic volume growth or drop in toll collections, then the returns that the InvIT will generate will suffer to that extent.
InvITs enjoy returns in the form of dividends, interest and buybacks. As per Securities and Exchange Board of India’s rules, at least 90% of funds collected, after paying for expenses, taxes and repayment of external debt, should be passed on to investors every six months. This may affect liquidity for managing the underlying asset.
Perhaps, it would encourage more participation once these InvITs make their maiden dividend payments to unitholders. But that will require investors to be patient and adopt a wait and watch strategy. Samarth Jagnani, head of equity capital markets India at Morgan Stanley, says: “In India, we expect new products like InvITs to gain gradual appreciation amongst the investor community as the investors understand that these are low-risk stable-return products, which as a portfolio allocation strategy the investors would be well served to have in their portfolio.”
To be sure, the product has done well in global markets. “The InvIT product has done well in countries like Singapore where there are pension funds and long-only funds dedicated to hybrid products,” says Jalan of Credit Suisse.
Interestingly, however, InvITs in India score on tax efficiency, and their yields also fare comparatively better. Sudip Sural, senior director at Crisil Infrastructure Advisory, says, “Global Trusts in Singapore and Malaysia offer indicative dividend yields ranging between 7% and 9% and these are ~200-300 basis points lower than that offered by the two recently listed Indian InvITs.” A basis point is 0.01%. “Indian InvITs are more tax-efficient as compared to its global peers as they are exempt from dividend distribution tax on dividend payouts. Also InvIT is exempt from paying any corporate tax which is not the case with business trusts outside India.”
One problem in the Indian market seems to be that the size of the investment pool for hybrid instruments is rather limited. According to Jalan, “It would help garner more interest as well as boost aftermarket performance if the size of the investment pool for InvITs were to increase—for example if pension funds were to invest in these hybrid products.”
Globally, there are dedicated REIT/Trust funds, whereas in India, this is still at a nascent stage, where these types of funds are being conceptualized, he adds.