While the Union Cabinet chaired by the Prime Minister Narendra Modi had approved the National Highways Authority of India (NHAI) setting up Infrastructure Investment Trust(s) (InvIT) in December 2019, the company has recently started meeting investor groups, as it prepares to come up with its InvIT issue.
The issue will enable NHAI to monetise its completed National Highways that have a toll collection track record of at least one year. The NHAI reserves the right to levy toll on identified highways and it will help the company raise funds for more road development across the country.
What are InvITs?
Infrastructure investment trusts are institutions similar to mutual funds, which pool investment from various categories of investors and invest them into completed and revenue-generating infrastructure projects, thereby creating returns for the investor. The capital market regulator notified the Sebi (Infrastructure Investment Trusts) Regulations, 2014 on September 26, 2014, and these trusts are likely to help facilitate investment in the infrastructure sector.
Structured like mutual funds, they have a trustee, sponsor(s), investment manager and project manager. While the trustee (certified by Sebi) has the responsibility of inspecting the performance of an InvIT, sponsor(s) are promoters of the company that set up the InvIT. In case of Public–private partnership (PPP) projects, it refers to the infrastructure developer or a special purpose vehicle holding the concession.
While the investment manager is entrusted with the task of supervising the assets and investments of the InvIT, the project manager is responsible for the execution of the project.
NHAI’s InvIT will be a Trust established by NHAI under the Indian Trust Act, 1882 and SEBI regulations. The InvIT Trust will be formed the objective of investment primarily in infrastructure projects.
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How does it work?
While the fund will be raised by monetising the completed NHs, the regulations say that the project SPV would distribute not less than 90 per cent of net distributable cash flow to the trust in proportion of its holding in each of the project SPV and further not less than 90 per cent of the net distributable cash flow of the trust will get distributed to the unitholders. The unitholders will get the distributions at least once every six month.
The fund raised can be invested in the project SPVs by way of an issue of debt. The trust can utilise it to repay their loans or even for prepayment of certain unsecured loans and advances availed by such project SPVs from the sponsor, the project manager and certain members of the sponsor group.
The Indian InvIT market is not yet mature and has supported formation of 10 InvITs till date — in roads, power transmission, gas transmission and telecom towers sectors — of which only two are listed, according to a report of the task force on National Infrastructure Pipeline. The InvITs listed on the stock exchange are IRB InvIT Fund and India Grid Trust.
The listed are required to maintain a maximum-leverage ratio of 49 per cent, which can be increased to 70 per cent subject to certain conditions, such as six continuous distributions to unit-holders and AAA-rating.
With the significant amount of funding required in the infrastructure sector and a gap in availability of long-term funds, this structure helps close that gap by enabling fund raising from capital markets.
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Why does NHAI need fund and how will it benefit the economy?
At a time when private sector investment in the economy has declined, fund-raising by NHAI and spending on infrastructure will not only provide a fillip to the economy, but will also crowd-in private sector investment. So NHAI’s InvIT offer, which is expected to come soon, is a way for the government to tap alternative sources of financing to boost public spending in the roads and infrastructure sector.
It is important to note that in October 2017, the Centre had launched Bharatmala Pariyojana, its flagship highway development programme, for development of 24,800 km of roads at a total investment of Rs 5,35,000 crore.
In order to complete the projects, NHAI needs adequate funds and one of the options is to monetise the completed and operational NH assets and offer attractive schemes to private players to invest in construction of National Highways.
How does it benefit the investor?
A retail or even a large financial investors may not be typically able to invest in infrastructure projects such as roads, power, energy etc. InvITs enable these investors to buy a small portion of the units being sold by the fund depending upon their risk appetite.
Given that such trusts comprise largely of completed and operational projects with positive cash flow, the risks are somewhat contained. The investors can benefit from the cash flow that gets distributed as well as in capital appreciate of the units. Unitholders also benefit from favourable tax norms, including exemption on dividend income and no capital gains tax if units are held for more than three years.
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