Kotak Insights - 1st Govt. Public InvIT for Domestic Investors: All You Need to Know

As you all know, India Inc. is going through a massive capex cycle, and the government is leaving no stone unturned – be it railway infrastructure, telecom infrastructure or EV charging infrastructure. Private corporate groups have also not shied away from going deep into their pockets.

India's capex cycle has greatly improved with the support of the right government policies like the Production Linked Incentive (PLI) Scheme.

Now, to meet the growing infra needs, the government needs more funds.

Sure, they could sell some of their assets and raise money from the public. But what if the government could also retain the assets and offer inflation-beating returns to the investors over the long term? It’s a win-win situation for the government and the investors, no?

Enter InvITs. An Infrastructure Investment Trust (InvIT) is an investment trust created for investors to buy into infrastructure projects. Infra and engineering companies sell their assets to InvITs to monetise their cash-generating infrastructure assets.

Think of them as mutual funds as their models are similar, just that InvITs are traded on the stock exchanges. InvITs are innovative vehicles that allow developers to monetise revenue-generating assets while enabling investors to invest in them without owning them.

Understanding the InvIT structure, advantages, and more

Mutual funds have a structure composed of a trustee, a sponsor, a project manager and an investment manager. It’s the same for an InvIT.

The sponsor is responsible for setting up the InvIT and appointing a trustee that acts as a fair overseer. The trustee’s job is to flag any concerns or unfair dealings (basically a watchdog) while the investment manager decides the capital allocation strategy. The project manager manages the maintenance and building of the projects owned by the trust.

InvITs function as a mechanism to raise capital for infrastructure developers, thus facilitating the development and maintenance of critical assets like roads, bridges, power plants, and communication networks.

By investing in InvITs, investors become beneficiaries of the cash flows generated by the underlying infrastructure assets. InvITs are required to mandatorily distribute at least 90% of the income through dividends and interest payouts on a bi-annual basis.

One of the key advantages of InvITs is the potential for steady income streams. Infrastructure assets often generate predictable cash flows due to long-term contracts or toll collection mechanisms, providing investors with a stable source of income.

Additionally, InvITs typically invest in multiple projects across various sectors, reducing the risk associated with individual projects.

This year, the government was kind enough to provide one more relief. While presenting the Union Budget in February 2023, the government proposed taxing income distributed by business trusts like REITs and InvITs as debt repayments at the hands of unitholders.

InvITs in India

Real estate investment trusts (REITs) have been rocking for several years, and it’s time for InvITs to gain the same popularity.

As per market regulator SEBI’s website, there are 21 InvITs in India at present. Most of them are private. This number is expected to shoot up in the coming years as private majors have announced their plans to come out with InvITs.

Reliance Industries, L&T, Power Grid and IRB Infrastructure have already used an infrastructure investment trust structure to reduce part of their debt. According to reports, Reliance Jio was the first to set up a big-ticket InvIT when it hived off its telecom towers and fibre optic assets to InvITs.

In 2021, state-run GAIL decided to scrap the plans to bifurcate the company and monetise some of its pipelines by selling a minority stake through InvIT.

Even companies like Reliance Retail and Vodafone Idea are considering an InvIT to pare down debt.

While more private players will no doubt consider this option going forward, the Indian government focuses primarily on one segment for more InvITs – roads and highways.

The Ministry of Road Transport and Highways, Nitin Gadkari, said in an interview that the government plans to open the National Highways Infra Trust (NHAI InvIT) every 15 days.

Towards the end of 2022, an InvIT by the National Highway Authority of India (NHAI) was floated with the issue of NCDs and guess what? The issue saw a bumper response with seven times subscription over its actual size.

Before this, in 2021, the NHAI trust raised a little over Rs 51 billion from institutional investors, which got a good response.

Though the government or the NHAI do not guarantee the bonds, they are secured by the underlying assets. Worse comes to worse, the underlying assets will be sold off in case of bankruptcy, and the bonds offered by NHAI generate around 8% per annum.

The bonds issued have a triple-A rating from credit rating agencies, and the tenures are also kept long at 13 years, 18 years and 25 years. So, the worst possible outcome could be a movement in interest rates as the bond’s value changes per changing interest rate.

As a first, the government recently decided to come out with its first listed InvIT for roads and national highways, where domestic retail investors can also hold units of the trust.

This was the initial plan, but due to SEBI’s regulations, the plan went on the back burner, and the government has now decided to go with a fresh trust with completely separate trustees, project managers, etc.

Currently, only two InvITs are floated by the government, while the rest are private.

As more InvITs line up, with even retail investors getting a chance to participate, the response could be good. The advantages are clear, with the potential for steady income streams from predictable cash flows and reduced risk through diversified investments across sectors.

As investors become more aware of the benefits of InvITs, this investment avenue will likely witness robust demand and contribute to the growth of India's economy.

See you with another interesting market story next week.

Until then - Happy Investing!

Sources: Kotak Securities, Swarajya, Company presentations Disclaimer: https://www.kotaksecurities.com/landing-page/researchreport-disclaimer/disclaimer.html