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Imagine an investor's portfolio that has the following holdings:
Reliance Industries Bharti Airtel 8% HDFC Bonds Jaipur-Agra Toll Road New Mangalore Port Maker Towers complex, BKC, Mumbai
Shares and bonds are familiar territory, so are mutual funds that invest in them. But roads, ports and commercial buildings? How do you go about owning a part of a road? And why? Welcome to the world of InvITs - a variant of REITs that invest in rent yielding commercial properties.
What are InvITs?
Infrastructure Invest Funds, or InvITs are akin to Real Estate Investment Funds, REITs, but with a specific goal. REITs invest in the real estate market, whereas InvITs invest specifically in infrastructure projects. Currently many of these infrastructure projects are starved of funds. This means that economic growth is less than optimal.
InvIts operate in much the same way as mutual funds. The idea is to garner funds from investors - institutional and individual. This includes investments from the likes of pension funds, sovereign funds as well as HNI investors for investment in infrastructure projects.
Presently debt is the main instrument for financing infrastructure projects. However, debt instruments have their own limitations in attracting investors. The main goal of InvITs is to encourage investment in infrastructure in India by tapping a wider pool of resources than has been the case hitherto.
Why InvITs?
Financialization of real assets is a global phenomenon and has been rapidly increasing in relevance in the developed world which has seen very low interest rates on financial instruments for far too long. The desire for healthy, predictable yields from real assets like commercial property, toll roads, ports etc is very high in markets that offer 1 and 2% return on bonds and deposits.
Instead of a consortium of banks lending for an infra project, the idea is to widen the base of lenders by offering a piece of action to InvITs, who then take in money from a range of institutional and individual investors. You can have models that only lend as well as models that lend as well as take an equity stake in the project, to try and secure an upside from a promising infra project.
Sebi and INvITs
In September 2016, Sebi notified the Sebi (Infrastructure Investment Trusts) Regulations. This prescribes the rules for registration and regulation of InvITs in India. Structurally, InvITS are similar to mutual funds. InvITs can be established as a trust and registered with Sebi.
The following terms are as defined by the SEBI.
An InvIT consists of four elements:
1) Trustee: The trustee, who inspects the performance of an InvIT is certified by Sebi and he cannot be an associate of the sponsor or manager.
2) Sponsor(s): 'Sponsors' are people who promote and refer to any organisation or a corporate entity with a capital of Rs 100 crore, which establishes the InvIT and is designated as such at the time of the application made to Sebi, and in case of PPP projects, base developer. Promoters/sponsor(s), jointly, have to hold a minimum of 25 per cent for three years (at least) in the InvIT, excluding the situations where an administrative requirement or concession agreement needs the sponsor to hold some minimum percent in the special purpose vehicle. In these cases, the total value of the sponsor holding in the primary special purpose vehicle and in the InvIT should not be less than 25 per cent of the value of units of InvIT on post-issue basis.
3) Investment Manager: Investment manager is an entity or limited liability partnership (LLP) or organisation that supervises assets and investments of the InvIT and guarantees activities of the InvIT.
4) Project Manager. Project manager refers to the person who acts as the project manager and whose duty is to attain the execution of the project and in case of PPP projects. It indicates that the entity is responsible for such execution and accomplishment of project landmarks with respect to the agreement or other relevant project documents.(Economic Times - Infrastructure Investment Trusts)
InvITs in India
India's first InvIT is sponsored by IRB Infrastructure Developers Ltd. The fund was launched in April this year. Several leading fund houses have enabled some of their schemes - typically balanced funds and MIPs to invest in InvITs. Over time, portfolios of popular hybrid funds that distributors sell, will see some interesting holdings of InvITs, as high yielding diversifiers.
How it works
With money raised from the public, the InvIT invests in a Special Purpose Vehicle (SPV) to the tune of at least 51%. The InvIT itself would be like an open ended fund that would continue to survive.For example IRB's InvIT has invested in six highways. Probably, new road projects would be given to new SPVs with the existing InvIT taking a majority stake. The SPV will then build the infrastructure and pay off its loans. Toll income and such like would accrue to the SPV, of which mandatorily at least 90% should be passed on to the parent InvIT. In turn InvITs would pay dividends to their unit holders.
Risk factors
Like with every new investment product, investors and investment managers alike are grappling with the question of just how risky the new InvITs are. One key area of risk taking would be the forecasting of the amount of toll collections that the underlying real asset of highways would be able to generate. Another concern is inflation, for while prices rise, toll charges are unlikely to keep pace. Further, a completely unpredictable factor would be estimating the quantum of traffic there would be on any particular highway in the future. TypicallyInvITs are long term investments, hence knowing the traffic pattern ten years down the line is vital but would be very difficult if not impossible. This may give rise to a dicey situation where while the InvITs incomes may be variable,the outgo as returns to investors may be agreed in advance and fixed. Political factors too may play spoilsport for InvITs prospects if,in the future, there is a demand to do away with road tolls.
Sebi rules say that no individual mutual fund scheme can invest more than 10% of its assets in Reits and InvITs and not more than 5% in Reits and InvITs issued by a single issuer. Overall, a fund house can only invest up to 10% of its units issued with a single issuer of Reits and InvITs. According to A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd: "We will look at assets that have been designed with predictable cash flow with less of uncertainty related to any potential risk like political events and slowdown in growth." (Livemint, Kayezad E. Adajania May 01 2017).
Looking Ahead
InvITs is a concept that has arrived not a day too late. It is well known that India has an infrastructure deficit. Even the extant infrastructure cannot measure up to world standards. Infrastructure includes road highways, railways, ports, airports, electricity projects, telecommunications and the whole gamut of building and equipment necessary for a modern economy to operate efficiently. All these are vital to push growth on to a higher trajectory, and which is needed to pull the masses out of poverty. It becomes all the more necessary, since it will give Indian enterprises that solid base from which to compete with the rest of the world on an equal footing.
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