Union budget proposals are set to boost investments in the infrastructure space with tax exemptions for private infrastructure investment trusts (InvITs), which have emerged as an investment route of choice for large institutional investors.
The budget tabled in the Parliament on Saturday has now accorded tax pass through status to private unlisted InvITs, which were till now available only to publicly listed InvITs or those InvITs that were sold to a small group of investors and subsequently listed on exchanges. The private unlisted InvIT regime was introduced by Sebi in 2019 but did not get the same tax treatment as the listed ones.
“Clause(13A) of the said section defines “business trust" to mean a trust registered as an Infrastructure Investment Trust under the Securities Exchange Board of India (Infrastructure Investment Trusts) Regulation, 2014 or a Real Estate Investment Trust under the Securities Exchange Board of India (Real Estate Investment Trusts) Regulation, 2014 made under the Securities and Exchange Board of India Act, 1992, whose units are required to be listed on a recognized stock exchange in accordance with the aforesaid regulations," said the finance bill.
It is proposed to amend the said clause so as to omit the long line relating to the requirement of listing of the business trust from recognised stock exchange in accordance with the regulations made by the Securities Exchange Board of India, the bill added.
While the first public offerings of InvITs came to the stock markets in 2017, when road developer IRB Infrastructure Developers Ltd and transmission line developer Sterlite Power Grid launched the IPOs of the respective investment trusts, these public InvITs failed to create strong interest among investors and subsequently, no new initial public offerings of InvITs have been seen on the stock exchanges.
Since then, InvITs have seen a rise in popularity but through the private placement route. Several large InvITs such as Reliance Industries Ltd’s investment trusts for its telecom towers and gas pipelines, collectively worth around ₹38,000 crore were set up in 2019.
“Previously, you could place InvITs privately, but they had to be then listed on exchanges, which would mean that you have to deal with regulations around insider trading and price-sensitive information, which may not be necessary in case of privately placed InvITs, as they are privately negotiated structures," said Vivek Mimani, partner at law firm Khaitan and Co.
The private InvIT structure, now with the tax pass through, will not just be attractive to investors but also for the sponsors who are looking to divest their infrastructure assets. “Even for a sponsor, this is a good move, because when you transfer the assets to a listed InvIT, you get a tax deferral, which was not available in the private InvIT structure. This is just a transfer of assets, they are not being sold, so to pay tax on such a transfer was an issue for sponsors," said Mimani.
He expects to see a strong demand for private unlisted InvITs in the coming months.
“We expect to see a lot of demand for this product in the next 3-6 months. Even those who were looking at listed InvITs might end up going down the private path. It’s a good structure and a win-win for both investors and sponsors," said Mimani.
“With the tax pass through benefit, the private InvIT will become an attractive structure for large investors such as pensions and sovereigns. You have a yield generating vehicle, which is Sebi regulated and which has a compulsory requirement to distribute cash regularly, as and when it is generated. And if there is a demand for the asset or liquidity, they can always go and list it and seek their exit," he said.