All about InvITs and How They Work

Nischay Avichal
InvITs, short for Infrastructure Investment Trusts, are pooled investment vehicles which own, operate or invest in real infrastructure assets like power plants, roads, transmission lines, pipelines etc. This investment route has opened up investor choice to invest in infrastructure projects for the better, which had earlier been primarily through investing in shares of companies engaged in the business of developing and maintaining infrastructure or through routes such as mutual funds. InvITs are also beneficial for infrastructure companies as it helps them raise extensive capital without incurring large debts and have various tax benefits due to the trust structure.




In this blog, we will understand what InvITs are, their benefits, the risks associated with them and more.




What are InvITs?




InvITs are similar to Mutual Funds or REITs in that the investment is pooled from various investors, and the vehicle is structured as a trust and regulated by SEBI.  The trust is established under the Indian Trusts Act, 1882 and the trust deed is registered in India under the Registration Act, 1908. Various parties involved in the functioning of InvITs are the sponsor, trustee, investment manager, and project manager. Currently, investible assets in InvITs comprise roads, power transmission units, gas pipelines, and tower transmission. Refer to the chart below, which summarises the structure of InvITs.




 


InvITs pay out periodic cash flow in the form of interest and dividends on a quarterly or bi-annual basis. As per SEBI regulations, at least 90 per cent of the NDCF (Net Distributable Cash Flow) must be mandatorily distributed to the unitholders. The chart below summarises the cash flow structure in InvITs.




 


Benefits






Diversification: Portfolio diversification is a vital aspect of investment and risk management. InvITs provide an alternative investment route for investors looking for better returns than what is presently being yielded from debt products in the market without taking a very high level of risk.

Capital Gains: Capital gains from InvITs enjoy a concessional long-term capital gains tax rate (10% for capital gains above 1 lakh) if the units are held for over three years and sold via the stock exchanges.

Liquidity: Listed InvITs are easily tradable on the exchange, similar to selling shares which makes exits easier, and there are no lock-ins involved. Recent changes bought forward by SEBI also seek to improve liquidity for listed InvITs (more below).

Low risk: InvITs do not have high risks of concentrating funds in a project that is stagnant or those that run the risk of closure. As per the SEBI regulations, InvITs must invest at least 80% of their assets in projects that are completed and revenue-generating. No more than 10% of their assets can go to under-construction projects. Besides this, InvITs have to mandatorily distribute at least 90% of the income through dividends and interest payouts on a bi-annual basis.

Robust corporate governance: Stringent regulatory and administration practices like independent trustees and investment managers, independent half-yearly valuation, 50% independent directors, leverage caps, strong minority investor rights, and stringent disclosure policies sum up to robust corporate governance in InvITs.





How and where to invest?




Any investor (domestic/foreign/retail/institutional) can buy InvIT units in India. You can invest either by subscribing to an IPO or an FPO of InvITs or purchase units of listed InvITs from the exchange. You will need to open a Demat account. Public InvIT units are listed and traded on a stock exchange like equity shares. 




The minimum investment amount for public InvITs is in the range of 10K to 15K, with the trading lot being one unit. The recent removal of high minimum investment criteria by SEBI is aimed at opening doors to easy accessibility and tradability of these instruments.




Presently, there are 18 SEBI-registered InvITs in India. Of these, IndiGrid InvIT, PowerGrid InvIT, and IRB InvIT are the only listed ones. The former two invest in power transmission assets, while IRB InvIT invests in road assets, where toll collection forms the crux of revenue.




You can also invest through mutual funds. Mutual Funds are not allowed to invest more than 5% of their total assets in alternative investment funds such as InvITs. So if you are planning for a substantial investment in InvITs, this isn’t the best route.




What are the investment risks?






Operational risks: Unavailability of underlying infrastructure projects can hurt InvIT revenues. Other risks like ad hoc expenses, delays in collection, volume or traffic risk, and tariff risk are also forms of operational risk. Infrastructure projects are also highly regulated in India. You should ideally invest in InvITs with stable underlying assets, diversified projects, higher distribution yields, and an experienced management team.

Limited choice: Currently, there are only three listed InvITs on the stock exchange, which tightly constricts the investment choice for a retail investor.

Cash flows & market risk: Price fluctuations in the market can result in capital gains or losses. Income generation or cash flow from infrastructure projects like roads/highways, electrical distribution networks, etc., depends on two key factors – tariffs and traffic, which, in turn, can affect the increase or decrease in the income generated by the project.


How are they different from REITs?




REITs and InvITs are similar in structure, but there are a few important distinctions between them, the first and obvious one being the investment objective itself. REITs, unlike InvITs (which invest in infrastructure projects), invest in investment grade and income-producing real estate properties such as industrial parks, offices, malls, warehouses, hospitality, etc. Another distinction is that InvITs can either be publicly listed, private listed or private unlisted, whereas REITs must be publicly listed. 




Taxability




InvITs invest in infrastructure assets either through SPVs (Special Purpose Vehicles) or directly. The SPVs pay InvITs in the form of interest, dividends and debt repayment, which is, in turn, paid back to the investors. Hence, InvITs generate different kinds of income for investors. As an investor, you will be subjected to tax only with respect to that portion of the cash flow distribution, which represents interest income and revenue from underlying infrastructure assets. 




Further, if the SPVs have opted for a lower tax regime, you would also be taxed for dividend income. All other cash flows are exempt from tax.




Any capital gains you incur on the sale of InvIT units through the exchange are taxed as short-term gains or long-term gains, depending upon the period of holding. If sold within three years, short-term capital gain taxes will be applicable, and gains will be taxed at 15%. Long-term capital gain taxes will be applicable if sold after three years, and gains exceeding 1 lakh will be taxed at 10%.




We hope this blog gave you a clear idea about InvITs. Let us know what you think about InvITs in the comments below.



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