What is Infrastructure Investment Trust (InvITs)?
An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as a return. InvITs work like mutual funds or real estate investment trusts (REITs) in features. InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
SEBI notified the Sebi (Infrastructure Investment Trusts) Regulations, 2014 on September 26, 2014, providing for registration and regulation of InvITs in India. The objective of InvITs is to facilitate investment in the infrastructure sector.
InvITS are like mutual funds in structure. InvITs can be established as a trust and registered with Sebi. An InvIT consists of four elements:
3) Investment Manager
4) Project Manager.
The trustee, who inspects the performance of an InvIT is certified by Sebi and he cannot be an associate of the sponsor or manager.
‘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 per cent 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 a post-issue basis.
The 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. 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 the case of PPP projects. It indicates that the entity is responsible for such execution and accomplishment of project landmark with respect to the agreement or other relevant project document.
Advantages of InvITs:
- Diversification: InvITs with multiple assets offer individuals an opportunity to diversify their investment portfolio. Such a feature directly helps lower associated risks and further allows investors to generate steady returns in the long run.
- Fixed income: The option to redistribute risks and accrue a fixed income serves as a potent alternative for generating fixed income, especially for retirees. Also, including such an investment tool would help those who intend to plan retirement effectively.
- Liquidity: Generally, it is easy to enter or exit from infrastructure investment trust, which directly enhances their liquidity aspect. However, small investors may find it challenging to sell a high-valued property quickly.
Disadvantages of InvITs?
- Regulatory risk: Even the slightest change in the regulatory framework like taxation or policies concerning the infrastructure sector would have a ripple effect on InvITs.
- Inflation risk: A high rate of inflation has a significant impact on the performance of infrastructure investment trusts. For instance, inflation may increase the sector’s operating cost. Further, an increase in the toll rates would lower the prospect of generating substantial returns.
- Asset risk: Typically, investment in infrastructure has a long gestation period, and hence the process of generating returns is often delayed. Such a delay not only takes a toll on the cash flow but further hampers profit projections.