6 myths to guard against while investing in InvITs
Understanding InvITs correctly will empower investors to take informed investment decisions
we believe instruments like InvITs and REITs are currently underresearched and underappreciated. Any new instrument requires deep dive research and time for issuers to demonstrate operating track records and unit holder distributions.
Taking a leaf out of global markets, once investors start appreciating the stable cash flow and distribution by InvITs in the coming quarters, these new instruments can be expected to become more prevalent in the domestic markets.
We have seen two InvIT issuances in recent months that have raised close to ~7,000 crore from the market. As expected, there has been a flurry of questions and uncertainties. In working with developers and investors on InvITs, we came across several perception gaps or myths and below provide clarifications to some of the most critical: Myth 1: InvITs are unregulated InvITs are governed by the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014. Further, an independent trustee registered with Sebi holds the assets in trust for the benefit of unit holders and is responsible for compliance with Sebi regulations. Myth 2: InvITs are debt instruments InvITs are neither debt nor equity instruments but have characteristics of both. The underlying de-risked infrastructure assets of InvITs provide stable, low-risk annuity like cash flows comparable to a debt instrument. InvITs also have equity like features as the return is not fixed and is dependent on the cash generated by the business. Further value accretive acquisitions can provide upside in the returns. Myth 3: InvIT distributions are in the form of dividend Distributions from InvITs can take the form of dividends, interest, capital repayment or a combination of these. The nature of the distribution to unit holders depends on the nature of the cash flows to the InvIT from the SPVs that form part of the structure. Myth 4: InvIT returns are tax-free InvITs distributions to unit holders can be in the form of interest or dividend. Distributions in the form of interest are taxable as per the income tax rates applicable. Distribution in the form of dividends are exempt from income tax.
Long-term units (held for more than three years) if sold through a recognised stock exchange is subject to securities transaction tax, the gain arising thereon shall be exempt from income tax. If short-term units are sold through a recognised stock exchange this would also be subject to securities transaction tax, with the gain taxable at the concessional rate of 15 per cent. Myth 5: InvITs don’t have growth prospects InvITs are established to own and operate assets in infrastructure sectors such as power, roads, ports. InvITs investment managers act as “portfolio managers”, who look to progressively add assets that enable growth in investor returns. InvITs grow by acquiring assets
Myth 6: InvITs are a vehicle for debt restructuring where the sponsor can drop down assets at any price
InvITs provide sponsors an avenue for monetising their operating infrastructure assets. There are strict eligibility criteria. As per regulations, 90 per cent of the assets that an InvIT owns must have an operating track record of at least one year.
Moreover, the valuation of a sponsor’s assets during acquisition has to be undertakenbyanindependentexpert.Governance framework provided by law ensures InvITs acquire assets at the appropriate value for the benefit of all stakeholders.
As the market develops a better understanding of this new instrument, more InvITs will get listed from various infrastructure firms. This will provide infrastructure developers with the ability to redeploy capital more efficiently and take on more projects, while also giving investors more choices to invest their capital. It is important for investors to understand InvITs correctly, empowering them to take more informed investment decisions.