Infrastructure requires heavy investments, given the limited public funds, there is a need to identify new channels to raise funds. InvITs are an innovative way to raise finance to stimulate the growth in this sector.
What are InvITs?
InvITs are infrastructure investment trusts which operate like mutual funds they pool investments to invest in infrastructure assets. The underlying assets of InvIT could be roads, pipelines, power plants, thermal projects etc. The amount pooled from the public are used for investing in infrastructure projects which generate revenue, such revenue is distributed among investors as a dividend. InvITs have the flexibility to invest in revenue-generating finished infrastructure projects, these projects invite funds through a public offering. They can also invest in projects which are under construction, these projects use the private placement route for raising funds. The InvITs can either invest directly or through a special purpose vehicle. The minimum investment is Rs. 10,000 to Rs. 15,000, the minimum trading lot size is a single unit. The public InvIT units are listed and traded on the stock exchange like equity stocks.
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Understanding the nuances of InvITs
A. Business Structure:
Their business structure and operations are similar to that of REITs and are regulated by SEBI. There are 4 entities involved in InvITs – A trustee who invests a minimum of 80% in infrastructure projects, Sponsors who own 15% of total InvITs, an Investment manager who oversees funds operational activities, a project manager who evaluates the project for investment.
B. Investment mandate:
There are regulatory restrictions on the type of projects in which InvITs can invest. They mitigate under construction risks by investing 80% of funds in finished and revenue-generating infrastructure projects. 90% of the revenue generated by the trust is distributed among investors in the form of a dividend. They are designed as long-term contracts of 15 – 20 years, most of the underlying assets are projects which have similar tenure, the contract duration depends on the underlying assets. By investing in projects which are yet to be complete, they provide the opportunity of extraordinary profits on completion of the project.
Benefits of investing in InvITs
InvITs are a relatively new investment avenue that can be considered by anyone who wants to add a dash of stability to the portfolio. Here are the key advantages of investing in this avenue –
1. Low-risk cash flow –
The investment mandate has restrictions on the quantum of under-construction projects, only 10% can be exposed to these types of projects which carry high risk. At least 80% of the assets have to be in completed and revenue-generating projects, thereby reducing the risk substantially. Infrastructure is plagued with risks including delays due to regulatory approvals, delayed completion, the abrupt closure of projects etc., these risks are eliminated given the strict regulations in place.
2. Regular long term cash flow –
Minimum of 90% revenue generated from the investments made by the trust have to be methodically distributed among investors in the form of dividends. The dividends are paid out semi-annually, thus providing clarity on the frequency and quantum of cash flow. These contracts are of 15 – 20 years, thus providing consistent cash flow over the long term. The underlying assets are required to have high credit quality and low risks.
3. Well regulated –
These funds are regulated by SEBI, these trusts are managed by independent trustees, independent valuers are required to conduct half-yearly valuations of underlying assets and the operations of the fund. There are mandatory requirements such as ratings, leverage etc., for choosing the right project for investment. Like all other investment avenues managed by SEBI, these too have strict disclosure policies to adhere to.
4. Liquidity –
Public InvITs are listed and traded on the exchange like equity shares, they are highly liquid. They offer greater liquidity as compared to other investments which are close-ended or have a fixed maturity period.
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InvITs are hybrid – they combine the features of both equity and debt. These instruments provide stable and low-risk cash flows in the form of dividends which makes their risk profile similar to that of debt, they are also subject to price fluctuations thereby providing an upside potential similar to that of equity. They are a great way to reduce risk and add stability to your existing portfolio.