Recently, the Securities and Exchange Board of India (Sebi) introduced a framework for issuing subordinate units by privately placed InvITs (Infrastructure Investment Trusts).

Key Highlights

  • Purpose of Issuance: The issuance aims to address valuation gaps between the asset valuation done by the Sponsor (as the asset seller) and that by the InvIT (as the asset buyer).
    A sponsor refers to the entity which sets up the InvIT. An InvIT can have a maximum of 3 sponsors. 
  • Risk Mitigation Measures: The framework includes risk mitigation measures for the issuance of subordinate units.

Issuance Conditions: Subordinate units will only be issued by privately placed InvITs upon acquiring an infrastructure project.

  • The amount of subordinate units issued by the InvITs shall not exceed 10% of the acquisition price of the infrastructure project.  
  • Further, InvITs cannot raise funds through public issues if there are any outstanding subordinate units.

Amendments to InvIT Rules: SEBI amended the InvITs regulations to give effect to the new framework.

Subordinate Units

  • They have inferior or no voting rights and distribution rights compared to the ordinary units issued.
  • They can be reclassified into ordinary units on meeting performance benchmarks and after three years of issuance. 

About the InvITs 

  • An Infrastructure Investment Trust (InvIT) is a collective investment scheme similar to a mutual fund, allowing individual and institutional investors to directly invest in infrastructure projects, such as highways, and earn a portion of the income as returns.
  • The InvITs are regulated by the SEBI under SEBI (Infrastructure Investment Trusts) Regulations, 2014. 

Significance of InvITs

  • Diversification: Investors looking to diversify their portfolios can opt to invest in listed infrastructure companies and infrastructure mutual funds.
  • Professional management: The infrastructure project is professionally managed by qualified operators. This assures smooth and efficient operation of the infrastructure project.
  • Regular Income: InvITs have to mandatorily distribute at least 90% of the income through dividends and interest payouts on a quarterly or bi-annual basis. 
  • InvITs can generate profits on their assets in three ways i.e. three-in-one returns: Capital gains, dividends, and interest.
  • Capital Gains: Units of an InvIT can be traded on stock exchanges similar to shares. So if the InvIT performs well, the price of units will increase. People can sell units at a profit and receive Capital Gains. 

Challenges of Investing in InvITs

  • Unpredictable Cash Flows: The income generated by infrastructure projects such as roads/highways etc depends on tariffs and usage. Variations in either can cause income fluctuations.
  • Taxable Dividend and Interest Income: Dividends and interest income from InvITs are fully taxable according to the investor’s income tax slab rate. People in the highest tax bracket could end up paying up to 30% in taxes on these earnings.
  • Limited Investment Options: With only two publicly listed InvITs in India, retail investors have very few investment choices.
  • Low Liquidity: Although InvIT units can be traded on the stock market, there is limited market participation from buyers and sellers. This can make it challenging to sell InvIT units at a fair price in emergencies, resulting in low liquidity for these investments.

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