· An estimated Rs two trillion is likely to be raised through InvIT route over the next five years
· While full tax exemption to sovereign funds could attract these funds, the overall impact of higher tax incidence for unit holders may play spoilsport
Bengaluru, NFAPost News Service: As per an ICRA study, over the next five years, the InvITs pipeline is estimated at a robust Rs 2 trillion (including Rs. 800 billion in next one year itself).
Assets from roads, telecom fibre, power transmission and generation are expected to be on the block. The most keenly watched would be National Highway Authority of India (NHAI) InvIT, given its size and track-record of operational toll road projects. However for InvITs to succeed a conducive regime is the key and much would depend on regulatory and tax regime.
Till date, Rs 220 billion have been raised from the investors through InvITs, while another Rs 325 billion is in advanced stages. Tower Infrastructure of Reliance Jio, a second InvIT from IRB – privately placed with GIC and acquisition of eight road assets by L&T’s IndInfravit from Sadhbav are the ones in advanced stages.
Commenting on the trend, ICRA Senior Vice-President Shubham Jain says InvITs are an attractive vehicle for developers to unlock capital deployed in operational projects and helps in reducing the cost of debt for infrastructure projects.
“Foreign institutional investors find InvITs attractive due to their stable long-term returns, relatively lower risks because of operational portfolio and better corporate governance. Besides such vehicles have better credit profile due to benefits of cash flow pooling, diversification of assets and regulatory cap on both leverage and proportion of under construction projects,” said ICRA Senior Vice-President Shubham Jain.
At present, infrastructure financing is extremely bank centric. Banks and NBFCs together account for more than 95% of Infra debt. However, the prevalent ALM issues constrain the debt tenure.
Around 22% of National Infrastructure Pipeline is expected to be undertaken by private sector and would require Rs. 15.7 lakh crore of debt over five years, at 70:30 D/E ratio. While Infrastructure Debt Funds (IDFs) aim at taking out existing debt, InvITs facilitate unlocking capital (both debt and equity) and are therefore preferable.Therefore, InvITs has the potential to fill this gap.
The recent announcements in Union Budget FY2020-21 are expected to have a varied impact on InvITs. The removal of Dividend Distribution Tax (DDT) has partially diluted the pass-through benefit available with InvITsand with dividend now being taxable in the hands of shareholder/unit holders will be negative as higher tax incidence in the hands of the unit holders will result in lower net-yield and reduced equity IRR.
Full tax exemption have been given to sovereign wealth funds which could support higher participation from sovereign funds.An Amendment in definition of Business Trusts has been made to include Unlisted Private Placed InvITs. This will lead to tax parity between Unlisted and Listed Private Placed InvITs resulting in former likely to gain prominence due to lower compliance cost.
ICRA Senior Vice-President Shubham Jain said domestic unit holders are likely to witness 34% drop in returns while foreign investors would witness around 22% decline in returns.
“Overall, the impact of higher tax incidence for unit holders may play spoilsport thereby making equity raising challenging for InvITs,” said ICRA Senior Vice-President Shubham Jain.
As far as the market performance is concerned, ICRA notes that the complex nature of InvIT limits participation from all investor classes; it requires sophisticated understanding of the underlying assets.
Further, given the concession based nature of assets with finite life; the distribution from InvIT is a mix of return of capital and return on capital. The market performance of publicly placed InvITs remained subdued so far. The distribution yield has been in the range of 11-12% on issue price for these InvITs, adjusted for capital erosion the return would be lower to that extent.