Infrastructure Investment Trust (Invits), Features, Providers, Uses, Limitations

Infrastructure Investment Trusts (InvITs) are collective investment vehicles, similar to mutual funds, that allow individual and institutional investors to invest in infrastructure projects. By pooling funds from investors, InvITs invest in infrastructure assets that generate income, such as highways, power plants, bridges, and utilities. These assets typically provide a steady cash flow, often through long-term contracts. InvITs are designed to offer investors a share in the income, as well as the potential appreciation of the infrastructure assets they invest in. Structured to provide both liquidity and stable income, InvITs are listed on stock exchanges, allowing investors to buy and sell units much like stocks. They are an attractive option for investors seeking regular dividends and those looking to diversify their investment portfolio into the infrastructure sector, with the added advantage of professional management overseeing the investments.

Features of Infrastructure Investment Trust (Invits):

• Income Distribution:

InvITs are required to distribute a significant portion of their cash flow to investors, typically 90% of their net distributable cash flows, at least semi-annually. This feature makes InvITs appealing to investors seeking regular income.

• Listing and Trading:

InvITs are listed on stock exchanges, providing liquidity to investors. This allows investors to buy and sell units of InvITs in the open market, similar to how stocks are traded. The listed nature also ensures transparency and price discovery.

• Diversification:

By pooling funds from various investors, InvITs invest in a diversified portfolio of infrastructure assets. This diversification can help reduce risks associated with investing in individual infrastructure projects.

• Professional Management:

InvITs are managed by professional managers who have expertise in identifying, acquiring, and managing infrastructure assets. This management structure allows individual investors to invest in infrastructure projects without needing to have expertise in the sector.

• Regulatory Oversight:

InvITs in India are regulated by the Securities and Exchange Board of India (SEBI), ensuring that they adhere to stringent regulatory requirements designed to protect investors. The regulatory framework covers aspects such as disclosure norms, investment and valuation policies, and compliance requirements.

• Tax Efficiency:

InvITs offer certain tax advantages to investors. For example, the income distributed by InvITs is often tax-exempt at the hands of the investors, subject to certain conditions. This makes InvITs a tax-efficient vehicle for earning income from infrastructure investments.

• Long–term Growth Potential:

Infrastructure projects typically have long gestation periods but can offer steady and predictable returns over time. Investors in InvITs can potentially benefit from both the income generated by these assets and the appreciation in the value of the assets over the long term.

• Access to Infrastructure Sector:

InvITs provide a unique opportunity for individual and institutional investors to gain exposure to the infrastructure sector, which is often difficult to access directly. This can be particularly attractive in emerging markets where infrastructure development is a key driver of economic growth.

Providers of Infrastructure Investment Trust (Invits) in India:

• IRB InvIT Fund:

Sponsored by IRB Infrastructure Developers, one of India’s leading toll-road operators, IRB InvIT Fund focuses on the highway and road sector. It was the first InvIT to be listed on the Indian stock exchanges.

• IndiGrid InvIT Fund:

India Grid Trust, or IndiGrid, focuses on the power transmission sector. It aims to provide stable and predictable returns by owning and operating power transmission assets across India.

• PowerGrid InvIT:

Sponsored by Power Grid Corporation of India Limited, a Government of India enterprise and the largest power transmission company in India, PowerGrid InvIT invests in power transmission projects across the country.

• Embassy Office Parks REIT:

While primarily a Real Estate Investment Trust (REIT), Embassy Office Parks also has characteristics similar to an InvIT due to its focus on leasing office spaces, which include properties used by IT and financial services sectors that can be pivotal in infrastructure development.

• Brookfield India Infrastructure Manager Private Limited:

Brookfield Infrastructure Fund is managed by Brookfield Asset Management and focuses on a wide range of infrastructure assets, including roads, railways, and urban infrastructure.

• Oriental InfraTrust:

Managed by Oriental Structural Engineers Pvt. Ltd., Oriental InfraTrust focuses on investments in road infrastructure projects across India.

Limitations of Infrastructure Investment Trust (Invits):

• Market Risk:

InvIT units are subject to market volatility and can experience price fluctuations based on market sentiment, interest rate movements, and changes in the economic environment. This can affect the investment’s value and returns.

• Liquidity Risk:

Despite being listed on stock exchanges, some InvITs may suffer from low trading volumes, making it difficult for investors to sell their units quickly without impacting the price. This liquidity risk is a significant consideration for investors needing more predictable access to their capital.

• Interest Rate Sensitivity:

InvITs often rely on debt financing for acquiring assets and for their operations. Rising interest rates can increase borrowing costs and potentially reduce distributions to investors. Additionally, as interest rates rise, fixed-income investments become more attractive relative to InvITs, possibly leading to a decrease in demand for InvIT units.

• Regulatory and Policy Risks:

InvITs are heavily regulated, and changes in government policies or regulations can have a direct impact on their operations and profitability. For example, changes in taxation laws or regulations affecting the infrastructure sector can affect InvITs’ performance.

• Operational and Management Risks:

The success of an InvIT largely depends on the quality of its asset portfolio and the efficiency of its management team. Poor management decisions, operational failures, or underperformance of acquired assets can negatively impact returns.

• Project-Specific Risks:

InvITs invest in infrastructure projects that may be subject to project-specific risks such as construction delays, cost overruns, or operational inefficiencies. Such issues can affect the cash flows and, consequently, the distributions made to investors.

• Concentration Risk:

Some InvITs may have a concentrated investment in specific infrastructure sectors or geographical areas, exposing investors to sector-specific or region-specific risks. Any adverse developments in these sectors or regions can have a disproportionate impact on the InvIT’s performance.

• Limited Diversification for Investors:

While InvITs offer diversification within the infrastructure sector, investors exclusively investing in InvITs may lack diversification across different asset classes, increasing their portfolio’s vulnerability to the sector’s downturns.