Sebi likely to ease InvIT, ReIT framework

Photo: Reuters
The Securities and Exchange Board of India (Sebi) is looking at ways to revive the infrastructure investment trust (InvIT) market. After two listings earlier this year, the fortunes of the newest investment vehicle that helps cash-starved infrastructure companies raise capital by transferring assets and listing them as InvIT s have seen a slump. 

No companies are coming forward with InvIT plans, while the trading volumes on the two existing ones — India Grid Trust and IRB InvIT Fund — have dried up.

Sources say Sebi at its board meeting on Thursday could announce relaxations in the InvIT and real estate investment trust (ReIT) framework.

Tax clarity, changes in the minimum ticket size, and allowing pension funds to participate are some demands made by players operating in this space. 

In the past two years, the Centre and Sebi have taken measures to boost the market. But more can be done, say industry players.

The recent provisions around the fair market value (FMV) of unlisted shares have unexpectedly created tax concerns among InvIT sponsors. According to the new rules, for taxation purposes the FMV of the unquoted shares will be used against the earlier practice of book value. While coming up with an InvIT, a sponsor typically creates a special purpose vehicle (SPV) which is unlisted. 

The SPV then transfers the shares to the InvIT. While earlier the book value of assets was being used as a benchmark, under the new rules the tax incidence is expected to be much higher as the fair value of the asset will be taken into consideration.

“While most of the taxation-related issues for InvIT s have been resolved, some ambiguities — specifically sections 50CA, and 56(2)(x) of the Income-Tax Act – remain, which raise an issue. Due to this, in some cases, there can be double taxation, i.e. on both the sponsor and the InvIT in case the transfer value is lower than the derived FMV. To avoid this, while transactions can happen above the fair market value, this in turn would adversely impact InvIT’s yield and consequently investors’ interest,” said Shubham Jain, vice-president, corporate ratings, Icra.

When it comes to taxation, there is not much Sebi can do. However, there are areas, such as reduction in the investment ticket-size, where Sebi can provide some relief, say experts.

The liquidity in the two listed InvIT s has been drying up due to the bigger lot size. For instance, the average daily volume in the India Grid Trust fell from Rs 210 crore in June to Rs 50 crore in December. Similarly, the average daily volume in IRB Invit has fallen from Rs 260 crore in June to Rs 79 crore in December. The minimum ticket size for participating in an Invit is Rs 10 lakh.

The high ticket size acts as an entry barrier to discourage smaller retail investors from investing in these products as they are don’t have the knowledge about the product and risks involved in it.

“InvITs are complex products and many small-time investors might not be able to understand risks. However, an unintended consequence of this rule has been poor liquidity. Sebi should consider lowering the entry size to at least Rs 2 lakh or Rs 5 lakh so that more and more investors can participate,” said a banker.

There has been a lot of talk about allowing the Employees' Provident Fund Organisation (EPFO) to invest in the InvIT space. Sources say while Sebi has expressed no concerns about the proposal, the Ministry of Labour and Employment is yet to take a call.

Indian investors have been wary of InvITs ever since their inception. The response to both the InvITs has remained subdued and also the post-listing performance is also not encouraging. During the IPOs, a large part of subscriptions came from foreign institutions and although mutual funds and insurance companies were allowed to invest in the Invits, they largely preferred to remain on the sidelines.

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