Why and when InvITs can be a good investment opportunity

Consider the infrastructure and the time-tested investment option available in this area are largely NHAI bonds. Direct exposure to shares of infrared companies has its pitfalls. InvIT or trust for infrastructure investments is somewhere between bond and equity. The main assets for InvITs are roads and transmission projects and this is a product regulated by SEBI, which in some cases is registered and operates as a mutual fund. InvITs are special vehicles that help the infrastructure company secure revenue from the asset. Here are the key things you need to know about them.

How they work

InvITs are a hybrid between debt and equity; they have stable and predictable cash flows such as debt and offer a range of changes in the unit price that is a characteristic of equity. With 80% completed assets transferred from the asset owner to the fund, it significantly eliminates the risk of the project and starts generating cash flows from Day 1.

InvITs also have predictable cash flow, as the underlying assets typically provide long-term cash flows, typically for 15-20 years. The risk involved lies in the quality of cash flows, which usually depends on the type of project, the route of traffic that benefits from it, the use of capacity and tariff pricing.

InvITs are a game of volume. More projects need to be added to InvIT to increase revenue streams. The financial health, management and quality of the parent of InvIT will play a role in making the investment call.

Invitations must declare 90 percent of the net cash flow surplus as a distribution, and this must be distributed at least once every six months. The distribution of InvITs has mainly three components – interest (received from major projects), dividend (return on equity invested in projects) and income accrued at the level of trust, which is neither interest income nor dividend.

InvITs Vs. REIT

REIT (Real Estate Investment Trust) can be called a sister tool of InvIT. Both are quite similar in principle, although REITs work on commercial properties such as offices, malls, industrial parks, warehouses, hotels and health centers.

Like InvITs, REITs also require 80% of the underlying assets to generate income and have relatively stable cash flows. InvITs may be publicly traded or may be privately quoted, while REITs must be publicly traded.

Listed InvITs are returned

India Grid Trust has given a return of 45% since its inception, the Power Grid Infrastructure Investment Unit has given a return of about 28% since its inception, while the IRB InvIT Fund has given a negative 37% return since its inception.

Most of the IRB InvIT Fund’s underlying assets are loss-making, and the distributable surplus consists mainly of interest income, which may give a negative return.

Taxation

The interest component of the unit allocation (DPU) is taxed at the rate, while the dividend component is exempt if the main SPVs of the project have not chosen a preferential tax regime.

InvIT / REIT is subject to 10% withholding tax.

For India Grid Trust, interest income is a major part of the distributions and has opted for a reduced tax for all but one of its SPVs, and therefore dividend income is also not released into the hands of the investor.

In the case of Power Grid, four of the five major projects have opted for a preferential tax regime and will therefore have a taxable dividend and an exempt dividend for the investor. For fiscal year 22, the Power Grid 2.5 DP is a taxable dividend and a 1.08 dividend is exempt. Although in terms of exceptions, the InvIT network looks good now, but the scenario may change once more projects are added.

Who should go for it

InvITs are best suited for high net worth (HNI) individuals. Even when the minimum amount of investment is reduced from 1 lakh ₹ to 10,000 rupees to 15,000 rupees. However, InvITs are at an early stage and regulations are still evolving. As with AMC shares, InvIT shares may also be subject to regulatory change. Understanding the infrastructure sector and the main projects for assessing the visibility and revenue growth (including capital growth) is a must and this makes the product best positioned for niche investors.

Posted on

June 18, 2022

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