23rd May 2022

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Infrastructure investment funds (InvIT)

While the Union Cabinet chaired by Prime Minister Narendra Modi approved the creation of the National Highway Authority of India (NHAI) to create infrastructure investment funds (InvIT) in December 2019, the company recently started Meet Groups Investors to Prepare Think about your InvIT theme.

  • The show will allow NHAI to monetize its completed national highways with a toll collection history of at least one year. NHAI reserves the right to collect tolls on identified roads and will help the company raise funds to further develop roads across the country.

What are invitations?

  • Infrastructure investment trusts are institutions similar to mutual funds, which group the investments of various categories of investors and invest them in completed infrastructure projects that generate income, generating profits for the investor.
  • The capital market regulator notified the Sebi (Infrastructure Investment Trusts) Regulation 2014 on September 26, 2014, and these trusts are likely to facilitate investments in the infrastructure sector.
  • Structured like mutual funds, they have a trustee, sponsor (s), investment manager, and project manager. While the Trustee (certified by Sebi) is responsible for inspecting the performance of an InvIT, the Sponsors are the promoters of the company that created the InvIT.
  • In the case of public-private partnership (PPP) projects, this is the infrastructure developer or a special purpose vehicle that owns the concession.
  • While the Investment Manager is responsible for overseeing InvIT’s assets and investments, the Project Manager is responsible for the execution of the project.
  • NHAI InvIT is a trust established by NHAI under the Indian Trusts Act of 1882 and the SEBI Regulations. InvIT Trust will be formed for the purpose of investing primarily in infrastructure projects.

How does it work?

  • Although the fund will be raised by monetizing the completed NHs, the regulations establish that the SPV project would distribute not less than 90% of the net distributable cash flow to the trust in proportion to its participation in each of the SPV projects and, furthermore, not less 90%.
  • The percentage of the net distributable cash flow of the trust will be distributed to the participants. Unitholders will receive distributions at least once every six months.
  • The funds raised can be invested in the project’s SPV through a debt issue. It can be used by the trust to repay your loans or even for the prepayment of some unsecured loans and advances that the sponsor, the project manager and some members of the sponsoring group take advantage of such project SPVs.
  • The Indian InvIT market is not yet mature and has supported the formation of 10 InvITs to date, in the areas of roads, power transmission, gas transportation and telecom towers, of which only two are listed, according to a report of the National Infrastructure Pipeline Working Group. The InvITs listed are the IRB InvIT Fund and the India Grid Trust.
  • Listed companies must maintain a maximum leverage ratio of 49%, which can be increased to 70% under certain conditions, such as six rolling distributions to shareholders and a AAA rating.
  • Given the large amount of financing required in the infrastructure sector and the unavailability of long-term funds, this structure helps fill this gap by enabling fundraising in financial markets.

Why does NHAI need funding and how will it benefit the economy?

  • At a time when private sector investment in the economy is slowing, NHAI’s fundraising and infrastructure spending will not only stimulate the economy, but will also attract private sector investment.
  • Therefore, the NHAI InvIT offer, which is expected to arrive soon, is a way for the government to leverage alternative sources of financing to boost public spending in the road and infrastructure sector.
  • It is important to note that in October 2017, the Center launched Bharatmala Pariyojana, its flagship highway development program, for the development of 24,800 km of roads with a total investment of Rs 5.35,000 crore.
  • To carry out the projects, NHAI needs adequate funding and one of the options is to monetize NH’s completed and operational assets and offer attractive programs for private actors to invest in the construction of national highways.

How does this benefit the investor?

  • A retail investor or even a large financial investor may not be able to invest in infrastructure projects such as roads, power, electricity, etc. Invites allow these investors to buy a small portion of the units sold by the fund based on their risk appetite.
  • Since these trusts largely consist of completed and operational projects with positive cash flow, the risks are somewhat contained. Investors can benefit from distributed cash flow as well as the capital appreciation of the units.
  • Unitholders also benefit from advantageous tax rules, in particular the exemption of dividend income and the absence of capital gains tax if the shares are held for more than three years.
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