Recent amendments made to the regulations of infrastructure investment trusts (InvITs) and real-estate investment trusts (REITs) by the Securities and Exchange Board of India (SEBI) are likely to enable increased penetration of these financial instruments, according to a note by ICRA.
The first amendment pertains to reduction of the minimum allotment lot for publicly issued InvITs from Rs 1 million to Rs 0.1 million, and for publicly issued REITs from Rs 0.2 million to Rs 50,000. Similarly, the minimum trading lot for InvITs is reduced from Rs 0.5 million to Rs 0.1 million, and for REITs from Rs 0.1 million to Rs 50,000. This is expected to increase the reach of retail investors in such instruments. Current investment avenues for retail investors in income-generating infrastructure and real-estate projects are limited owing to high minimum investment requirements for alternate investment funds (AIFs) and other pooled funds. Listed InvITs and REITs can be a transparent and stable investment option for retail investors because of the various regulatory stipulations.
The other key amendment is the increase in leverage limit for InvITs from the earlier 49 per cent of the InvIT’s assets to 70 per cent. This is subject to additional disclosure and compliance requirements, which include a minimum track record of six distributions on a continuous basis, and a credit rating of AAA or equivalent for the consolidated debt.
According to Shubham Jain, Vice-President and Group Head, Corporate Ratings, ICRA, “The high credit ratings of InvITs also factored in the earlier regulatory cap of 49 per cent on the extent of leverage, which can be undertaken by an InvIT. Now, with the increase in permitted leverage, that comfort will reduce. Nevertheless, the additional compliance requirements of maintenance of AAA rating and distribution track record does provide some comfort.”
At 70 per cent leverage, the total debt to net-worth ratio will increase to 2.33 times compared to 0.96 times at 49 per cent leverage levels. With higher leverage, the debt-service coverage ratio (DSCR), a key ratio to measure credit-worthiness, would also be significantly lower, assuming other things remain the same.
Further, SEBI has introduced a separate framework for privately placed unlisted InvITs, which limits the minimum investment by an investor at Rs 10 million, while leaving the number of investors, leverage and type of underlying assets at the discretion of the issuer and InvIT. After this amendment, private InvITs will be able to increase leverage, and take up more projects under construction depending on the investor’s risk appetite.