The initial public offering (IPO) for IRB InvIT, India’s first infrastructure investment trust fund will open for subscription on May 3 and close on May 5. Sponsored by road developer IRB Infrastructure Developers Ltd., the trust aims to raise up to ₹4,035 crore. Reliance Infrastructure, Sterlite Power Grid Ventures and other infrastructure firms are also gearing up to unveil InvITs.
What are InvITs?
InvITs are similar to mutual funds. While mutual funds provide an opportunity to invest in equity stocks, an InvIT allows one to invest in infrastructure projects such as road and power.
How do InvITs work?
InvITs raise funds from a large number of investors and directly invest in infrastructure projects or through a special purpose vehicle. Two types of InvITs have been allowed: one, which invests in completed and revenue generation infrastructure projects; the other, which has the flexibility to invest in completed or under-construction projects. InvITs which invest in completed projects take the route of public offer of its units, while those investing in under construction projects take the route of private placement of units. Both forms are required to be listed on stock exchanges.
How do InvITs help the developer?
InvITs allow developers of infrastructure assets to monetise their assets by pooling multiple projects under a single entity (trust structure). For instance, IRB InvIT constitutes six special purpose vehicles consisting of toll-road assets aggregating to 3,645 lane kilometres of highways located across the states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu. Infrastructure projects suffer from lack of availability of long-term capital and have depended on bank finance which typically has a short tenure. InvITs are designed to attract low-cost, long term capital and the underlying focus is to reduce the funding pressure on the banking system as well as generating fresh equity capital for infrastructure projects.
What is the structure of InvITs?
InvITs are registered as trusts with SEBI and there are four parties — trustee, sponsors, investment manager and project manager. In the case of IRB InvIT, IRB Infrastructure Developers Ltd. is the sponsor, IDBI Trusteeship Services Ltd. is the trustee, IRB Infrastructure Pvt. Ltd. is the investment manager and the project manager is Modern Road Makers Pvt. Ltd.
What is each party’s role?
Sponsors are the firms which set up the InvITs. Investment managers manage assets and investments of InvITs and undertake activities of the InvIT. The project manager is responsible for executing the projects. The trustee oversees the role of InvIT, investment managers and project manager and ensures that all rules are complied with.
For which class of investors are InvITs suitable?
As per present regulations, InvIT investments are not open for small and retail investors. The minimum application size for InvIT units is ₹10 lakh. The main investors could be foreign institutional investors, insurance and pension funds and domestic institutional investors (like mutual funds, banks) and also super-rich individuals.
What do InvITs mean for investors?
According to SEBI 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. IRB InvIT is expected to pay about 12% as returns to investors. Dividend income received by unit holders is tax exempt. Short-term capital gain on sale of units is taxed at 15%, while long-term capital gains are tax exempt. Interest distributed to unit holders is taxed.
What are the potential investment risks?
InvITs are listed on and are subjected to the vagaries of the stock exchanges, resulting in negative or lower returns than expected. An economic downturn or project delays may hit infrastructure projects and result in lower returns. As in mutual funds, investors in InvITs have no control over investments and exits being made by the trust.
