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InvITs Function and Generate Returns

Context

The recent bond offering from the National Highway Infrastructure Trust (NHIT) has sparked a lot of interest in Infrastructure Investment Trusts, or InvITs.

Relevance

GS Paper 3: Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

Mains Question

Infrastructure is the foundation of the Indian economy. Discuss the government’s recent Budget measures to boost infrastructure development. (250 words)


InvITs are Infrastructure Investment Trusts

  • An infrastructure investment trust is a pooled investment vehicle similar to a mutual fund.
  • Unlike mutual funds, which invest in financial securities, InvITs invest in real infrastructure assets such as roads, power plants, transmission lines, pipelines, and so on.
  • InvITs are typically structured as trusts, with an independent trustee holding assets on behalf of unitholders.

How do InvITs operate?

  • InvITs are intended to reduce under-construction risks in the infrastructure sector by requiring that at least 80% of the investment be made in completed and revenue-generating projects.
  • The instrument aims to provide consistent and predictable cash flows by distributing 90% of the net distributable cash flow to investors.
  • These assets are subject to long-term contracts that provide a consistent cash flow over a long period of time—typically 15-20 years, depending on the underlying assets.
  • They offer the opportunity to expand by adding more operating projects and increasing yield.
  • Public InvIT units, like equity stocks, can be listed and traded on a stock exchange.

Uses of InvITs

  • InvITs assist infrastructure developers in freeing up capital by monetising completed assets.
    • The infrastructure developer can transfer a portion of its revenue-generating assets to an InvIT, which will then issue units to its investors.
  • As a result, InvITs promote infrastructure development by providing an efficient way to raise capital from individual and institutional investors and fund new project development.
  • On the other hand, InvITs allow individual investors to invest in a long-term yielding instrument in the infrastructure space.
  • From the standpoint of stakeholders, InvITs proposition for stakeholders involved includes
    • Developers: Monetize operational assets to free up capital for new asset development.
    • Lenders: Diversify exposure to higher-rated infrastructure assets of higher quality.
    • Investors: Profit from a portfolio of operational assets with stable and predictable returns.
    • Government: Monetization to allow for additional infrastructure development.

The risks of investing in InvITs are as follows:

  • Operational danger –
    • These include risks associated with force majeure events, which impair the availability of underlying infrastructure projects and have a negative impact on revenues.
  • Risk of refinancing –
    • Infrastructure projects are mostly financed with debt.
    • This assumes large lump sum payments and fluctuating interest rates, which may pose a refinancing risk.
  • Regulatory danger –
    • In India, infrastructure is a highly regulated industry. Because InvITs are still in their infancy, the regulations are still evolving.
  • Risk of return –
    • Because public InvITs are traded on stock exchanges, unit prices may fluctuate, resulting in capital gains or losses, just like equity stocks.
    • It is also important to note that the trust’s cash flows are dependent on the underlying business.

The Importance of InvITs from the Indian Perspective:

  • The Central Government had already identified InvITs as a means of attracting large institutional long-term infrastructure investors.
  • The government’s National Infrastructure Pipeline projects funding needs of more than $1.4 trillion by 2025.
    • At least $325 billion in private sector infrastructure investment is expected. A significant portion of this could come from InvITs.
  • In order to allow for capital recycling and additional investments under PPP modes, InvITs play an important role in monetising existing projects in some of these sectors (with conducive regulatory frameworks, cash flow profile, and taxation advantage).
  • InvIT assists developers in releasing invested equity and deploying capital in new projects.
    • This may enable them to address the challenge of projects with high capital expenditure requirements.
  • Another advantage of InvITs for businesses is that the proceeds are not considered debt.
  • Similarly, because the company launching InVIT does not dilute any of its shares, it does not count as equity.

How many InvITs exist today, and how much money have they raised so far?

  • Currently, 15 InvITs are registered with SEBI, with seven listed on stock exchanges. The market capitalization of the listed InvITs exceeds $10 billion.
  • In 2021-22, InvITs collected a total of 21,195 crore. This included funds raised by unlisted InvITs.
  • Funding was obtained through an initial offer, preferential issue, institutional placement, and rights issue.

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