Infrastructure Investment Trust Fund

Why in news?

The initial public offering (IPO) for IRB InvIT, India’s first infrastructure investment trust fund will open for subscription.

What are InvITs?

• InvITs are similar to mutual funds.
• While mutual funds provide an opportunity to invest in equity stocks, an InvIT allows one to invest in infrastructure projects such as road and power.

How do InvITs work?

• InvITs raise funds from a large number of investors and directly invest in infrastructure projects or through a special purpose vehicle.
• Two types of InvITs have been allowed: One, which invests in completed and revenue generation infrastructure projects; the other, which has the flexibility to invest in completed or under-construction projects.
• InvITs which invest in completed projects take the route of public offer of its units, while those investing in under construction projects take the route of private placement of units.
• Both forms are required to be listed on stock exchanges.

How do InvITs help the developer?

• InvITs allow developers of infrastructure assets to monetise their assets by pooling multiple projects under a single entity (trust structure).
• For instance, IRB InvIT constitutes six special purpose vehicles consisting of toll-road assets aggregating to 3,645 lane kilometres of highways located across the states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu.

What is the structure of InvITs?

• InvITs are registered as trusts with SEBI and there are four parties — trustee, sponsors, investment manager and project manager.
• Sponsors are the firms which set up the InvITs.
• Investment managers manage assets and investments of InvITs and undertake activities of the InvIT.
• The project manager is responsible for executing the projects.
• The trustee oversees the role of InvIT, investment managers and project manager and ensures that all rules are complied with.

For which class of investors are InvITs suitable?

• The minimum application size for InvIT units is Rs. 10 lakh.
• The main investors could be foreign institutional investors, insurance and pension funds and domestic institutional investors (like mutual funds, banks) and also super-rich individuals.

What do InvITs mean to investors?

• According to SEBI rules, at least 90% of funds collected, after paying for expenses, taxes and repayment of external debt, should be passed on to investors every six months.
• Dividend income received by unit holders is tax exempt.
• Short-term capital gain on sale of units is taxed at 15%, while long-term capital gains are tax exempt.
• Interest distributed to unit holders is taxed.

What are the potential investment risks?

• InvITs are listed on and are subjected to the vagaries of the stock exchanges, resulting in negative or lower returns than expected.
• An economic downturn or project delays may hit infrastructure projects and result in lower returns.
• As in mutual funds, investors in InvITs have no control over investments and exits being made by the trust.

Source: The Hindu