Just like mutual funds, an infrastructure investment trust (InvIT) is a pool of funds collected from many institutional investors for investing in completed infrastructure projects to earn from regular dividends. InvITs invest in infrastructure building activities such as roads, telecommunication towers or power plants.
InvITs can invest in infrastructure projects, either directly or through a special purpose vehicle (SPV). Let us understand the concept by taking an example of a highway road. Typically, infrastructure companies build roads by taking loans. These companies can now form a trust to raise capital to meet their debt liabilities and undertake maintenance work. These companies generate revenue by collecting tolls, which they will distribute among investors.
Stock exchanges list units of InvITs on their platform for trading activities like a stock. These units are neither fully equity nor debt instruments; instead, it is a combination of both. While the periodic cash flows through dividends gives InvITs units a debt like flavor, the mark to market gain component through stock exchanges gives capital appreciation to a certain extent.
Who can invest?
Only institutional investors and HNIs can invest in units of InvITs as the minimum ticket size is Rs.10 lakh. After listing, the minimum ticket size is Rs.5 lakh. Currently, SEBI has allowed banks, mutual funds and insurance companies to invest in InvITs.
How much they can invest?
SEBI rule allow fund houses to invest up to 10% of NAV in REITs and InvITs. Fund houses can invest up to 5% in single issuer.
Similarly, insurance companies can invest up to 3% of the fund size in these instruments.
Banks can invest up to 10% of the unit capital in REIT or InvIT.
Currently, the dividend income that is distributed by these trusts is exempted from tax.
In addition, government has exempted long-term capital gain tax (LTCG) in InvITs if the security is held for over 3 years. Short-term capital gain tax is 15% in InvITs. Capital gain tax is applicable only if the investors pay securities transaction tax (STT).
So far, only two companies - IRB and India Grid have floated InvITs. A few more players like Sterlite Power Transmission, IL&FS Transportation Network and MEP Infrastructure development are in process of filing draft offer documents with SEBI to launch InvITs.
Benefits of investing in InvITs
Professionally managed: Just like mutual funds, an investment management team led by two or more professionals makes investment decisions in relation to underlying assets.
Liquidity: It facilities easy entry and exit in the infrastructure sector as the units of the infrastructure trusts can be sold and bought on the exchanges.
Diversification: Diversification of investment holdings in the mutual fund schemes can help decrease the risk associated with it.
Minimised risk: These are low-risk products as they invest only in completed projects.
Regular dividends: SEBI has mandated InvITs to distribute 90 percent of net-distributable cash flows every six months making it an attractive investible instrument.