InvIT: A preferred vehicle crosses AUM of Rs 4 trillion
- National Infrastructure Pipeline
- Infrastructure Investment Trust
- Vijay Agrawal
- Equirus Capital Pvt Ltd.
- urban centres
- industrial parks
- multimodal logistics
- New greenfield expressways
- Delhi Mumbai Freight Corridor
- Eastern Freight Corridors
- Airports Authority of India
- Varanasi Multimodal Logistics Park
The Government has aimed to monetise assets of more than Rs 6 trillion as per National Infrastructure Pipeline (NIP). InVIT (Infrastructure Investment Trust) will be a mainstay to achieve National Infrastructure Pipeline (NIP) targets for various government departments, explains Vijay Agrawal, Director, Equirus Capital Pvt Ltd.India wishes to become a $ 5 trillion economy in the next 3 to 5 years. This goal is achievable given the vibrancy in the Indian economy. The growth will be supported by better infrastructure including roads, airports, ports, urban centres, industrial parks, multimodal logistics etc. The Government of India has committed to invest more than Rs 100 trillion in the next five years to upgrade infrastructure. New greenfield expressways have been planned for faster movement of goods and passengers. New highways have been planned for interconnectivity and reduction in distance. Overall this will result in reduced time for movement between two destinations. The port connectivity has been improved for faster evacuation of goods from ports. Railways have also planned to double their freight-carrying capacity in the next 5 years. New dedicated freight corridors have been planned in addition to Delhi Mumbai Freight Corridor and Eastern Freight Corridors. New lines are being planned from the mining belt to the rest of India for faster movement of minerals and finished goods. At many places, additional lines have been planned alongside existing railway lines to reduce congestion. New airports are being planned to improve air connectivity and reduce travel time. The Airports Authority of India is planning for more than 50 new greenfield airports and upgrading existing airports to increase their capacity. Multimodal logistics parks are being planned at many places to provide for multi-modal logistics. For example, Varanasi Multimodal Logistics Park (MMLP) provides road, rail and water connectivity. These parks are aimed at faster movement of goods with reduced cost of logistics. Many of state governments have planned for industrial corridors along with road or railway networks. These help in the rapid industrialisation of the region and growth in manufacturing capacity. The industrial corridors and parks provide ready infrastructure for setting up of units with faster approvals and reduced time to start. Financing of infrastructure These infrastructure developments will require long-term financing since these projects have a long gestation period. Long-term funds can be provided by institutions like pension funds, insurance companies, infrastructure finance corporations etc. These institutions have long-term funds with a maturity of more than 15 years. Recently, Government of India has set up National Bank for Financing Infrastructure and Development (NaBFID) which is dedicated to infrastructure financing and takeout financing. Commercial and public sector banks are also active in infrastructure financing but in create asset liability mismatches for them. Hence, there is a need for DFI to give exit to these banks. Private sector participation The private sector plays an important role in infrastructure development and maintenance. Since infrastructure projects are long gestation projects and cash flows are generated after more than 5 to 7 years of operation, they require long-term equity. Infrastructure projects also require a larger amount of equity to fund these projects. Many times projects take 3 to 5 years for construction and again 5 years for stabilisation. The private sector participation in the development of infrastructure projects is at reduced capacity due to the constraint of long-term equity. Hence, government is constructing these projects and then monetising them by way of TOT (Toll Operate Transfer), OMT (Operate Maintain Transfer), PPP (Public-Private Partnership), etc. There is good interest from domestic and international investors for investment in operating assets. The government of India has also planned a monetisation pipeline targeting to raise more than Rs 5 trillion. InvIT a preferred asset holding structure InvIT (Infrastructure Investment Trust) has become a preferred holding structure for infrastructure assets. InVIT attracts long-term capital in an efficient way from an investor’s perspective. InvIT gives flexibility for investment and divestment of assets. InvIT has gained acceptance due to required regulatory changes from time to time and acceptability in the Investor community. The Income Tax exemption to Sovereign and Pension Funds has made it as most preferred vehicle for ownership of assets. InvIT has come a long way in India with wider acceptance of the product. It has become a mainstay for the monetisation of assets by the Private Sector and Government. Today, InvIT has an AUM of Rs 4.45 trillion which is a benchmark in itself.There are private listed and public listed InvIT across asset classes. The broad AUM of InvIT between private listed and public listed is shown in Table 1. Class of assetsThe InvIT has encompassed various asset classes under its umbrella such as road, telecom, pipeline, power transmission and renewable.Telecom sector has garnered the highest share in InvIT AUM (refer Figure 1) due to transactions by Reliance. After the telecom sector, road has the second largest share in InVIT AUM followed by transmission and renewables and then gas pipeline. Attractiveness of InvIT as an investment product classInvIT has become a yield product. Globally it is named as REIT and has more than $ 3.1 Trillion AUM. These are yield products where in investor gets an assured and steady cash flow which is not volatile. These cash flows are not dependent on volatility in the Stock market with you getting better returns in the stock market if the market is good and negative returns if the market is bad. These yield products generate steady returns even if the market is bad. Maturity in marketInitially, InvIT was a product meant for Foreign Institutions. But of late, it has gained acceptance in the domestic mutual fund, pension fund sector. Even retail investor and HNI have started investing in these products to balance their portfolio. Even balance mutual funds have started allocating more funds for such products. It helped in wider acceptance of the product and its maturity. Why InvIT gained acceptanceInitially, InvIT as a product didn’t gain much traction. IRB InvIT was the first listed InvIT which didn’t perform well due to a misunderstanding in Investors’ minds like the Equity instrument, InvIT is a hybrid product which gives assured returns like Bonds and but doesn’t fluctuate like Stock prices. It is a product where the investor is looking for Delta return than Bonds. It generally gives better returns between 2 to 3 per cent than a bond. Generally, InvIT is preferred for assured yield like contracted cash flows like payment per unit, annuity projects, and hybrid annuity projects. There is a new class of investors emerging which is ready to take a punt on toll projects where cash flows may be volatile in the short run like IRB Toll Road InvIT. Indian regulations have provided for regulated leveraging and restrictions on the acquisition of under-construction assets. These provide for the reduction of risk for investors and provide continuous cash flows. It is said that India has one of the best regulations in the world for InvIT. The debt ceiling on InvIT creates an automatic check on overleverage. Recently, it was seen in Western markets that many REITs have declared negative returns due to overleverage and increased interest rates due to global inflation.InvIT regulations provide for the separation of decision-making from ownership like a prescription of a minimum of 50 per cent independent directors on the Board. Sponsors cannot participate in voting for related party transactions. These provisions have strengthened corporate governance in InvIT and helped in its acceptance as a dependable investment product. The Government has aimed to monetise assets of more than Rs 6 trillion as per the National Infrastructure Pipeline (NIP). InvIT will be a mainstay to achieve NIP targets for various government departments.About the author:Vijay Agrawal is the Director at Equirus Capital Pvt Ltd and heads its Infra & Real Estate practice. He is a qualified Chartered Accountant with over 25 years of vast experience in deals across sectors. Agrawal is associated with various associations like CII, First Construction Council, etc for providing sectoral inputs.