How to Invest in Infrastructure Investment Trusts in India
Infrastructure is the backbone of any economy, as it provides the essential services and facilities for various sectors and activities. However, infrastructure development requires huge capital expenditure and long-term financing, which often poses a challenge for the government and the private sector. Moreover, infrastructure projects are subject to various risks, such as regulatory changes, environmental issues, delays, cost overruns, etc.
To overcome these challenges and attract more investment in the infrastructure sector, the Securities and Exchange Board of India (SEBI) introduced a new instrument called Infrastructure Investment Trusts (InvITs) in 2014. InvITs are collective investment schemes that enable direct investment of money from individual and institutional investors in infrastructure projects in India. They offer regular income and long-term capital appreciation to the investors. They are similar to mutual funds, but they invest only in completed and revenue-generating infrastructure assets, such as roads, highways, power plants, telecom towers, etc.
In this article, we will explain what Infrastructure Investment Trusts are, how they work, what are their benefits and risks, and how you can invest in them.
What are Infrastructure Investment Trusts and how do they work?
Infrastructure Investment Trusts are trusts that are registered with SEBI and are listed on stock exchanges. They are formed by sponsors, who are infrastructure developers or owners, who transfer their infrastructure assets to the trust. The trust then issues units to the investors, who become the unit holders of the trust. The trust is managed by a professional manager, who is responsible for the operation and maintenance of the assets, and a trustee, who is responsible for the supervision and protection of the unit holders’ interests.
The trust generates income from the infrastructure assets, either through tolls, tariffs, fees, or other payments from the users or the government. The trust distributes at least 90% of its net distributable cash flow to the unit holders as dividends, interest, or capital gains. The unit holders can also benefit from the appreciation in the value of the units over time.
What are the benefits of investing in InvITs?
Infrastructure Investment Trusts offer several benefits to the investors, such as:
Stable and predictable income stream: InvITs provide a regular income to the investors through dividends, interest, and capital gains. The income is usually linked to inflation, which helps to maintain the purchasing power of the investors. The income is also backed by long-term contracts or agreements with the users or the government, which reduces the uncertainty and volatility of the cash flows.
Diversification and risk reduction: Infrastructure Investment Trusts diversify the portfolio and reduce the risk of investing in a single infrastructure project or sector. InvITs invest in a portfolio of infrastructure assets across different geographies, segments, and stages of development. This helps to mitigate the impact of any adverse event or situation affecting a particular asset or sector.
Tax benefits: Infrastructure Investment Trusts offer tax benefits for certain categories of investors, such as exemption from dividend distribution tax and capital gains tax for long-term investors. This enhances the post-tax returns for the investors and makes InvITs more attractive than other fixed-income instruments.
Liquidity and transparency: Infrastructure Investment Trusts enhance the liquidity and transparency of the infrastructure sector by listing the units on stock exchanges. This enables the investors to buy and sell the units easily and at fair prices. It also provides the investors with regular information and disclosures about the performance and valuation of the assets and the trust.
What are the risks of investing in InvITs?
Infrastructure Investment Trusts also involve some risks and challenges, such as:
Performance and operational risks: Infrastructure Investment Trusts are subject to the performance and operational risks of the underlying infrastructure projects, such as delays, cost overruns, regulatory changes, environmental issues, etc. These risks can affect the income and value of the assets and the trust. For example, if the traffic volume or the power demand is lower than expected, the revenue of the toll road or the power plant may decline. Similarly, if the government changes the tariff or the tax policy, the profitability of the asset may be affected.
Competition and substitution risks: Infrastructure Investment Trusts may face competition from other modes of financing, such as bonds, loans, or public-private partnerships. These modes may offer lower costs of capital or higher returns to the developers or the investors. InvITs may also face substitution risks from alternative infrastructure assets or technologies, which may reduce the demand or the relevance of the existing assets. For example, if a new road or a railway line is built, the traffic on the existing toll road may be reduced.
Limited track record and history: Infrastructure Investment Trusts are a relatively new concept in India, and they have a limited track record and history of operations. This makes it difficult to assess the performance and the potential of the assets and the trust. It also creates uncertainty and skepticism among the investors, who may not be familiar with the concept and the benefits of InvITs.
High minimum investment and low trading volume: Infrastructure Investment Trusts have a high minimum investment requirement, which may deter small investors from investing in them. The minimum investment for public issues of InvITs is Rs 10 lakh, and for private placements of InvITs is Rs 1 crore. Infrastructure Investment Trusts also have a low trading volume, which may affect the liquidity and exit options for the investors. The trading volume of InvITs depends on the demand and supply of the units, which may vary depending on the market conditions and investor preferences.
How to invest in Infrastructure Investment Trusts?
To invest in Infrastructure Investment Trusts, you need to follow these steps:
Do your research: Before investing in Infrastructure Investment Trusts, you need to do your research and analysis of the assets and the trust. You need to understand the nature, quality, and performance of the infrastructure assets, the financial and operational track record and projections of the trust, the risks and returns involved, and the tax implications. You can refer to the offer document, the annual report, the investor presentation, and the website of the trust for more information. You can also consult your financial advisor or planner for guidance and advice.
Choose the Right Infrastructure Investment Trust: After doing your research, you need to choose the right Infrastructure Investment Trust that suits your investment objectives, risk appetite, and time horizon. You need to compare the different InvITs available in the market based on their asset portfolio, income distribution, growth potential, valuation, and ratings. You can also look at the past performance and the future outlook of the InvITs to make an informed decision.
Buy the units: Once you have chosen the Infrastructure Investment Trust, you need to buy the units of the trust. You can buy the units either through the initial public offering (IPO) or the secondary market. For the IPO, you need to apply through the online or offline mode and pay the application money. For the secondary market, you need to have a demat account and a trading account and place your order through the stock exchange platform. You can buy the units at the prevailing market price, or place a limit order at your desired price.
Hold or sell the units: After buying the units, you need to decide whether to hold or sell the units. You can hold the units for the long term and enjoy regular income and capital appreciation. You can also sell the units if you need liquidity or if you want to book profits or cut losses. You can sell the units through the stock exchange platform, at the prevailing market price, or place a limit order at your desired price.
Summary of SEBI guidelines for investing in Infrastructure Investment Trusts
SEBI has issued various guidelines and regulations for the formation, operation, and listing of Infrastructure Investment Trusts in India. Some of the key guidelines are:
An Infrastructure Investment Trust must invest at least 80% of its total assets in completed infrastructure projects capable of generating income.
An Infrastructure Investment Trust can invest up to 20% of its total assets in under-construction infrastructure projects, securities of infrastructure companies, or other permissible investments.
An Infrastructure Investment Trust must distribute at least 90% of its net distributable cash flow to the unit holders, at least once every six months.
An Infrastructure Investment Trust must have a minimum net worth of Rs 100 crore, and a minimum asset size of Rs 500 crore.
An Infrastructure Investment Trust must have at least five projects in its portfolio, with no single project exceeding 10% of the value of the portfolio.
An Infrastructure Investment Trust must have at least 25% public holding, with a minimum of 200 unit holders.
An Infrastructure Investment Trust must have a credit rating from a recognized rating agency, and a valuation of its assets from an independent valuer, at least once a year.
Conclusion
Infrastructure Investment Trusts are an innovative and attractive instrument for investing in infrastructure projects in India. They offer stable and predictable income, diversification and risk reduction, tax benefits, and liquidity and transparency to the investors. They also facilitate the development of the infrastructure sector in India by providing an alternative source of funding for the project developers. However, InvITs also involve some risks and challenges, such as performance and operational risks, competition and substitution risks, limited track record and history, and high minimum investment and low trading volume. Therefore, investors need to do their research and analysis, choose the right Infrastructure Investment Trust, and buy and sell the units wisely. Infrastructure Investment Trusts can be a valuable addition to your portfolio, if you understand their features and benefits, and invest in them prudently.
Disclaimer:Â Please note that while every effort has been made to ensure the accuracy of this article, it is always advisable to consult with a real estate professional or conduct further research for the most up-to-date and comprehensive information.
