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Monday, May 1, 2017

Infrastructure Investment Trusts (Inv-IT) - All You Need To Know

Infrastructure Investment Trusts (Inv-IT) are all set to see the light of the day with IRB Infrastructure Developers launching its public offer this week. Infrastructure companies believe that these instruments will help them shed debt and raise some funds. But the infrastructure sector comes attached with all kinds of risk; so these instruments are restricted to only those with deep pockets and the ability to take risk.
What is it?
Inv-ITs help companies monetise healthy infrastructure assets and provide a channel for investors to buy a stake in infrastructure projects. The money raised through the fund can be used only to buy infrastructure assets, both in the form of equity as well as debt. But the catch is, that of the total assets bought, the fund is required to invest at least 80 per cent in revenue generating infrastructure asset. The rest can be invested in under-construction infrastructure asset or securities of infrastructure companies.
So, how are the investors benefited? The trust distributes a proportion (in the case of IRB Inv-IT fund, it is 90 per cent) of the income generated from these projects to investors. So the toll revenue earned by the road projects and other revenue streams including interest and dividend earned from other investments, will have to be distributed.
The Inv-IT is managed by an investment manager. Since these instruments carry higher risk, the entry barrier for investment is high. For instance, minimum investment in the primary offer of IRB Inv-IT is ₹10 lakh while the lot size in the secondary market is ₹5 lakh. The sponsor is mandated to hold minimum 15 per cent of the equity for a minimum period of three years from the date of issue.
Why is it important?
If this model is well accepted by the market, it will provide relief, both to developers of infrastructure project as well as to banks. Why so? An infrastructure project is plagued by myriad risks at every stage of construction.
During the initial stages of project construction, land acquisition and environment regulations pose risks to project materialisation. Once the asset is constructed, the risk of projected revenue materialising causes considerable anxiety both to equity and debt holders. For instance, take the case of poor traffic flow and toll collection in many road projects. When revenue does not materialise as expected, the project promoters and lenders are often caught in a logjam.
Through Inv-ITs, promoters of infrastructure projects can sell some of their stable, revenue generating projects. The funds thus raised can be used to reduce debt and invest in their other projects that could be stuck due to lack of funds. As the cash flow of the companies improves, their debt servicing ability will also improve, providing relief to banks.
Why should I care?
If you are a high net worth individual (HNI) with a penchant for risk, you can definitely look into this option to invest for the long term. The market regulator, SEBI, has taken enough measures to ensure that investors are not taken for a ride by promoters and that there will be sufficient cash-flow from the assets to enable a decent pay-out; far above the risk-free rate of interest.
But once you invest, do keep an eye on the investment manager. Because, the overall risk and return profile depends on the kind of projects he invests in

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