Infrastructure Investment Trusts or more popularly known as InvITs have emerged as alternative investment in the last few years. The provision of distributing most of their surplus to the unitholders adds to the appeal for income seeking investors.
What are InvITs?
As mentioned on NSEIndia.com, an Infrastructure Investment Trust (InvITs) is Collective Investment Scheme quite similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return.
The InvIT is designed as a tiered structure with Sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).
Below is the structure of the PowerGrid InvIT. As you will notice, the Sponsor of the Trust is PowerGrid Corporation of India Limited, a PSU and it also holds a 15% stake in the InvIT.
PowerGrid Unchahar Transmission Limited acts as the Investment Manager for the InvIT / Trust. The Trust has stakes in the Infrastructure Assets either directly or via SPVs or Special Purpose Vehicles.
What are the key features of InvITs?
- Three tier structure: Sponsor – Trustee – Manager
- InvIT has to invest at least 80% of the money into completed and revenue generating infrastructure assets
- At least 90% of Net Distributable Surplus has to be paid out to the Trust by the holding assets/SPV (at least once in 6 months)
- Further 90% of the Net Distributable Surplus has to be paid out to the unitholders (at least once in 6 months)
- InvITs cannot borrow more than 49% of the value of the assets. Credit rating is required when borrowings become more than 25% of the value of the InvIT assets.
- InvITs can be listed or unlisted. Retail investors can invest in listed InvITs using their demat account on a stock exchange.
How are InvITs different from REITs?
InvITs hold / invest in infrastructure assets such as roads, ports, power infra, telecom & communication, etc. REITs are focused on Real Estate – commercials, residential, etc.
Otherwise the broad regulatory and operational framework is similar.
- Read our coverage on Embassy REIT
Who regulates InvITs?
InvITs refer to trusts which are registered with SEBI and are regulated by the SEBI (Infrastructure Investment Trusts) Regulations, 2014.
Which InvITs are available to retail investors in India?
As of June 26, 2022, there are currently 18 InvITs registered with SEBI, of which about 6 are listed. A few of them are:
- IRB InvIT – It holds road assets
- IndiGrid InvIT – Power Transmission assets
- Power Grid InvIT – Power Transmission assets
How much returns can one expect? Do they provide fixed income?
InvITs make income from tolls and fees that they charge for using their assets. Net of expenses, most of it is distributed to unitholders in the form of dividend/interest. Since this is a distribution of business income, we cannot add the elements of certainty to it. Hence, no fixed income.
However, going by the distribution rate of the listed InvITs, it appears they are able to provide about Rs. 3+ per unit on a quarterly basis. That translates to about Rs. 12 to Rs. 13 per year. But what is the %age return on your investment?
(Note: Distribution information is easily available on the websites of InvITs)
If you had invested in the IPOs of the InvITs at Rs. 100 each, the income translates to about 12% to 13% pre tax.
However, if you invest in today in IndiGrid InvIT at about Rs. 140, your income turns out be 8.6% pre tax. Not bad but you understand now that your buy price is important here.
Based on how the InvIT expands its portfolio, acquires more assets which add to its income, the distribution can go up in the future as well.
Then there are capital gains too as the value of units goes up over time. PowerGrid InvIT was IPOed at Rs. 100 last year in May 2021. The current price as on June 29, 2022 is Rs. 130. That translates to a 30% return. But look at the journey.
Beware: the price can go down from your buy price as well. See this.
What is the taxation of InvITs?
Interest and Dividend Distribution is taxed as per your regular tax bracket. If the InvIT has not opted for special taxation, then the interest portion can be tax free.
As for capital gains, if you sell after 3 years of purchase, you pay 10% tax on long term capital gains. For less than 3 years, you pay 15% short term capital gains tax.
Should I invest in InvITs?
The ultimate question. Let’s be clear InvITs do not provide a fixed income nor are capital gains assured.
Given that most infra projects in an InvIT are operational and revenue generating and they are assets which are likely to be in demand, the revenue potential is not lost.
InvITs hence could be considered as a part of the portfolio as an alternative asset which can help earn income for discretionary expenses along with a possibility of capital gain.
However, there are several factors to consider / watch out for. Let’s look at some of them.
Most infra projects are income tied for a specific time frame. For example, toll collection on roads is awarded for a designated number of years. Noida Toll Bridge (a company and not an InvIT) had to suffer as its toll collection ability was taken away.
Of course, the InvIT has the ability to dispose off and add more assets too to augment its revenue generation. Therefore, it is important to be with good backers / sponsors.
Finally, you should be able to make a strategic commitment to the portfolio. If you plan to have only a little portion of your portfolio in these assets, it’s not going to make a difference. Assess your needs and then decide if the investment makes sense.
Between you and me: Do InvITs make investing sense of you?