The InvIT is designed as a tiered structure with a sponsor setting it up. This structure, in turn, invests in the eligible infrastructure projects either directly or via special purpose vehicles. The returns from the project are distributed as dividends at fixed intervals, usually a year.
The catch is these entities need to keep on exiting older projects and adding more to their shelves. Since they also need to pay out dividends, they need to replenish their capital. This is because, unlike an ongoing company for whom dividend distribution does not result in price reduction, in the case of InvITs
the continuous distribution reduces their corpus as the underlying assets have a limited life. The only way to avoid this is to keep adding fresh assets.
The RBI has multiple concerns, the chief being the possibility of double financing of the same loans and the risks of ever-greening of loans gone sticky. These are valid concerns, acknowledge finance ministry officials, but the two are jointly putting up safeguards against them. These issues are likely to be resolved soon. The ministry is itself concerned that in a year when it is shoring up the capital of banks, ensuring the latter do not open up fresh ventures becomes necessary. The problem is that the woes of Indian banks have a lot to do with their exposure to the infra sector and yet it is this sector that needs bank financing the most.
The only way then, for the InvITs
to add to their glow is to attract investments from big money or banks and insurance companies. Indian markets have for long been reticent in welcoming derivative products, chiefly because the banks and insurance companies have been reluctant to pick up large chunks of these projects. Their reticence is because RBI has instructed the banks to forswear lending to InvITs.
So the sponsor companies for InvITs have to issue units to sell only to retail investors and use that to stay afloat. Despite the limitations, if the InvITs are able to issue Rs 40,000 crore as they have done in just six months since April, it is clear there is big potential here.
They have been helped, as the market regulator, the Securities and Exchange Board of India (Sebi) has stepped on to the pitch. It has brought in two changes. In July this year it amended the Sebi (Infrastructure Investment Trusts) Regulations, 2014 to raise the leverage ceiling (debt-to-asset value) for InvITs to 70 per cent from 49 per cent. This is subject to the trusts retaining a triple-A credit rating, along with a track record of six continuous distributions to unit holders. However, this leverage cap is not applicable to privately placed, unlisted InvITs. The other change is that foreign portfolio investors can invest in InvITs now. This has made life easier for the InvITs, since it raises their liquidity, which in turn can be used for deploying in more infrastructure assets.
As Nitesh Jain, Director, Crisil Ratings wrote in a note; “For new lenders and investors, InvITs provide a low-risk opportunity with steady long-term returns.” The Crisil note says the risk for banks can be cut down if they can insist that InvITs cannot invest more than 10 per cent of their assets in under-construction projects. “This insulates cash flows from project implementation risks. They can also mandate that at least 90 per cent of free cash flows must be distributed at least once in six months. This ensures that cash flows generated are used primarily for distribution to unit holders, and thereby provide steady returns.”