The InvIT is designed as a tiered structure with a sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles
On Thursday, state-owned PowerGrid Corp of India Ltd launched the public offer of the first Infrastructure Investment Trusts (InvITs) ever by a PSU. InvITs are collective investment vehicles similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return. InvITs enable developers of infrastructure assets to monetise their assets by pooling multiple assets under a single entity (trust structure). In India, InvITs are governed by SEBI (Infrastructure Investment Trusts) (Amendment) Regulations, 2016. InvITs are fast becoming a preferred route for private equity investors to hold operating infrastructure assets and for infrastructure developers to monetize their investments in these projects.
The InvIT is designed as a tiered structure with a sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs). The key features of InvITs are mandatory distribution of 90% of net distributable cash flows to the unit investors, leverage cap of 70% on the net asset value, and a cap on exposure to assets under construction (for publicly placed InvITs). The sponsor of the InvIT is responsible for setting up the InvIT and appointing the trustee. The sponsor should hold a minimum 15% of the units issued by the InvIT with a lock-in period of three years from the date of issuance.
How do InvITs help in capital building?
InvITs help infrastructure developers to recycle capital locked in long term infrastructure projects such as roads, transmission lines or renewable assets. Apart from equity, InvITs enable raising long-term debt through refinancing, by tapping a different set of investor class such as pension funds, insurance companies and sovereign wealth funds that tend to have a longer investment horizon and are increasingly looking for higher yield, but safe, investment opportunities in a word where a large chunk of their debt portfolio is giving very low to sometimes even negative yields.
Who can invest in InvITs?
In 2019, capital market regulator Securities and Exchange Board of India reduced the minimum investment limits on InvITs and REITs, making them more accessible. The minimum subscription limit for REITs was brought down to Rs50,000, from the earlier Rs2 lakh. For InvITs, it was reduced from ₹10 lakh to ₹1 lakh. InvIT invests in infrastructure projects. The projects can be in sectors such as transport (road, bridges, railways), energy (electricity generation, transmission, distribution), communication, etc.
A CRISIL Ratings analysis shows InvITs and real estate investment trusts (REITs) can potentially raise up to ₹8 lakh crore of capital for India’s infrastructure buildout over the next five fiscals. Combined assets under management (AUM) of InvITs and REITS have logged a whopping 42% compound annual growth rate (CAGR) since the launch of the first InvIT in fiscal 2018 to ₹2 lakh crore now.
How many InvITs are there in India currently?
Currently, there are 11 InvITs and REITs in India. Credit ratings on ten of these demonstrate the highest safety level (AAA) for three reasons: low debt, combined debt-to-AUM ratio of less than 35%, and over 90% of AUM deployed in operational assets.
Can insurance companies invest in InvITs?
The Insurance Regulatory and Development Authority of India (Irdai) has allowed insurers to invest in debt securities issued by InvITs and real estate investment trusts (Reits). The move is expected to improve the overall yield of the portfolios held by the firms, while providing more long-term funding to the realty sector. Irdai said insurers cannot invest in debt instruments of InvITs and Reits rated below AA as a part of the approved investments. As per Irdai, 75% of the insurers’ investments have to be in AAA-rated assets, while 25% can go to instruments rated AA or even A-. Moreover, an insurer can take exposure to below AA-rated instruments only after getting approval from the board.
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