InvITS: What are Infrastructure Investment Trusts and should you invest in them?
Two industries are crucial to any developing economy – infrastructure and real estate. A nation's progress can be helped forward by its infrastructure if it is well-established. A solid foundation is essential to attract and retain a steady stream of foreign direct investment and private equity.
The country's capital base may be bolstered, and essential industries can flourish with this influx of wealth. InvITs are a type of financial vehicle used to attract capital. This article will explore this idea and its potential benefits for a nation's infrastructure and economy.
What are InvITs?
InvITs or infrastructure investment trusts, allow individuals or institutional investors to invest in infrastructure and earn returns. Investing in an infrastructure investment trust is like putting money into a mutual fund. These trusts, also known as InvITs, have units traded on markets like stock exchanges. A hybrid of equity and debt, InvITs combine the best of both worlds. The Securities and Exchange Board of India oversees this type of investment.
These vehicles allow multiple investors to pool their resources to purchase a broader range of income-producing assets. Investors receive a portion of the cash flow through dividend payments.
Types of InvITs
There are two categories of infrastructure investment trust based on the means by which investors can put their money to work in infrastructure projects: directly and via special-purpose entities.
Investment in revenue-generating finished projects: Investors can invest in completed projects that are expected to generate income and typically does so through a public offering.
Investment in projects under construction: Further, investors may put money into ongoing or completed construction projects. Notably, this category prefers a covert distribution strategy for its units.
Structure of InvITs in India
The SEBI is notified of the creation of an InvIT, which functions as a trust. As a rule, there are four components that make up an infrastructure investment trust SEBI:
They must be a debenture trustee registered with SEBI. They must put at least 80% of their capital into revenue-generating infrastructure.
Usually, a sponsor is a company or other legal entity with a net worth of at least Rs. 100 crore, such as a limited liability partnership (LLP), a promoter, or a large corporation. In addition, they need to have a lock-in duration of at least three years or, as notified by any regulatory requirement, and own at least fifteen percent of the total InvITs. Sponsors act as a Special Purpose Vehicle (SPV) in public-private partnership (PPP) initiatives (SPV).
An investment manager acts as the legal entity of an LLP and is responsible for directing the company's investments.
Managing projects is primarily the authority's responsibility, which the project manager represents.
What are the advantages of InvITs?
In general, the most salient advantages of InvIT investment are highlighted here.
Individuals might benefit from the portfolio diversification of InvITs. This helps investors minimize risks and earn stable returns over the long term.
The ability to accumulate interest and principal on a fixed income: Redistribution of risks and accumulation of a fixed income is a powerful alternative to creating a stable income, especially for retirees. Those who wish to save adequately for retirement could also benefit from including such an investment tool.
They are very liquid because investors can quickly enter and leave infrastructure investment trusts. Even smaller investors may find it challenging to rapidly sell a property with a high value.
Superior Asset Management:
Investors in InvITs have access to skilled asset management. It helps to keep assets from being split up and guarantees efficient administration and distribution.
However, the following guidelines will help you comprehend how various components usually profit from investing in an infrastructure investment trust.
This investment choice provides investors with a guaranteed return on their money. In the case of an infrastructure investment trust, for instance, 90% of the company's net cash flow must be returned to shareholders. This indicates that money invested can produce a stable return for the investor. If InvITs have excess cash flow, investors will also get dividend income.
Promoters could drastically reduce their debt through an asset sale using InvIT investments. The money raised might then be reinvested by the promoters into more ventures.
What are the disadvantages of InvITs?
Some of the flaws of this investment route are as follows:
Dangers posed by regulations:
There might be repercussions for InvITs from even a minor shift in the regulatory framework, such as taxation or laws about the infrastructure sector.
The possibility of inflation:
A high inflation rate significantly impacts the performance of infrastructure investment trusts. Inflation, for instance, can push up the industry's overhead. Raising tolls would also reduce the likelihood of making significant profits.
Exposure to Asset-Related Danger:
Infrastructure investments typically have a long gestation period, delaying the onset of return. Such a hold-up not only reduces available funds but also reduces anticipated profits.
Who should invest in InvITs?
Both individual and institutional investors can invest in InvITs via an initial public offering. To participate in such an IPO, you'll need at least Rs. 10 lakh. To stress, assistance may be necessary if individual investors want to buy InvITs through an initial public offering. The ability to invest and the return prospects make infrastructure investment trusts attractive to high-net-worth institutions, individuals, etc.
Prospects of InvITs in India
The following are some possible advantages of investing in InvITs in India:
Refinancing possibilities for ongoing projects would expand significantly over time.
In addition to freeing up money that can be reinvested in new infrastructure projects, this measure is also expected to make it easier to refinance existing debt with more affordable long-term capital.
It would entice foreign capital to enter the Indian infrastructure market.
Investing in high-quality infrastructure assets still offers promising diversification prospects.
InvITs versus REITs
Following are some guidelines that will help you distinguish between InvITs and real estate investment trusts (REITs).
For investors, the liquidity of InvITs outweighs that of REITs. This distinction is because InvITs typically have a large trading lot size, making them unsuitable for retail investors. On the other hand, small investors can afford to participate in the REIT market because of the smaller unit price and trading size.
Stability of income:
InvITs are very susceptible to changes in the capacity of utilization and the scalability of tariffs, both of which significantly impact the predictability of income. Thus, income is typically precarious. In contrast to InvITs, REITs often provide a more reliable stream of revenue due to the long-term nature of their rental contracts for income-producing assets.
Hope for expansion:
InvITs' potential for expansion relies heavily on its ability to acquire concession assets successfully. On the other hand, REITs can only expand through activities like building new properties, renovating old ones, etc.
Suppose you want to diversify your portfolio but are still deciding whether to take a significant stake in InvITs. In that case, you may still get exposure to the market by purchasing these on the secondary market. Before investing in InvITs, however, you should educate yourself on the industry's performance and market state.
Q. What are infrastructure investment trusts?
Since InvITs aggregate money from private and institutional investors to finance infrastructure projects, they resemble mutual funds in many ways. As a return, investors might expect a fraction of the total revenue generated by the project.
Q. If you want to invest in InvITs, how much money do you need to start?
According to the recent SEBI standards from 2020, the minimum amount needed to invest in an InviT IPO is Rs. 1 lakh.
Q. Can investors gain access to liquidity through InvITs?
InvITs provide investors with liquidity by consistently dispersing revenue. Based on their earnings, some trusts may also regularly distribute dividends to their investors.
When the value of the securities held in a brokerage account goes below the maintenance margin, the account holder receives a margin call.
A real estate investment trust (REIT) is a company that owns and operates income-producing real estate assets to generate revenue.