Provide long-term refinance via infrastructure investment trust mechanism

Context

• In 2014, the Securities and Exchange Board of India (SEBI) introduced Infrastructure Investment Trusts (InvITs) as an avenue for infrastructure developers to divest operational projects and reduce their leverage.
• India had difficulty attracting and retaining long-term capital from overseas. Therefore, the Indian government introduced various initiatives to demonstrate domestic confidence to foreign investors.

Problem

• The GFC had resulted in a weak macroeconomic and inflationary environment, which coupled with policy gridlock and political instability, had led to the sluggish growth of infrastructure.
• The Indian infrastructure sector needed substantial investment to fulfill the demands of the growing economy.
• There was limited entry for foreign portfolio investors to capital markets because of restrictive foreign direct investment policies.

Stakeholders involved

• Securities and Exchange Board of India
• Digital Fibre Infrastructure Trust
• India Grid Trust
• India Infrastructure Trust
• Indian Highway Concessions Trust
• IndInfravit Trust
• IRB Infrastructure Developers Limited
• IRB InvIT Fund
• MEP Infrastructure Investment Trust
• National Highways Infra Trust

Innovation

• InvITs provided developers and the government (where they had an equity portion) an opportunity to monetise their assets by pooling multiple projects in a single entity, thereby releasing capital for further deployment in new projects.
• Individual and institutional investors pooled money and invested in income-generating assets. The cashflow generated was distributed among investors as dividend income.
• SEBI provided well-structured trust requirements – having a trustee, sponsors, an investment manager, and a project manager in place. Each had a crucial role to play in running an InvIT.

Timeline

Results and impact

• The Indian InvIT market has supported formation of 15 InvITs to date in the roads, power transmission, gas transmission, and telecom towers sectors, amounting to an aggregate initial offer value over INR700 billion (USD9.59 billion).
• Robust and predictable regulatory regime. The Reserve Bank of India has relaxed the Indian foreign investment and exchange control regulation to permit foreign investors to invest in units of InvITs, within an overall ceiling of 20% of their net worth. An InvIT is required to get listed within three years from the date of registration.
• A new source of liquidity for government. The trusts augmented government’s revenues and increased financing for critical sectors, including transportation and energy, by carving out a state-run entity into a fully-owned subsidiary.

Key lessons learnt

• Regulatory frameworks: Favourable tax regimes where InvITs were exempted from dividend distribution tax (subject to certain conditions) were established. This drove appetite and comparatively better yields.
• Regulatory frameworks: InvITs must hold investments in infrastructure assets for a minimum period of three years, which can ensure that InvITs do not make speculative investments.
• Procurement: 80% of the assets of the InvIT were required to be projects that have commenced commercial operations and have all requisite approvals in place. This ensured that the InvIT was viable in terms of return on capital and lower development risk.