Today we look at one of the new instruments to be introduced to the Indian financial markets – InvIT.
InvIT stands for Infrastructure Investment Trusts and are pooled investments in infrastructure projects. These InvITs are structured similar to the Mutual Funds having a trustee, sponsor, investment manager and a project manager.
The InvIT is like this:
- There are infra project like roads where tolls are earned
- Multiple projects are pooled together, and made into the InvIt from which units are issued.
- Tolls are collected and about 90% of the amount is paid out to the investors who own units
- When the tolls stop (“End of concession period”) that project is gone. When all projects are done, the InVIT is done, unless it buys new projects (for which it may have to issue new units too)
Cutting Debt of Banks, and Pushing Infra Forward
This reduces the burden from the current debt laden formal banking institutions [IRB has a total debt of Rs. 5,144 crore as of December 31, 2016 and some of the banking institutions that would benefit from the capital release would be Union Bank of India, Bank of India, Canara Bank and State Bank of India among others].
Banks lend to the developer (IRB) who builds these projects and pays interest from the cash flow.
The developer is strapped for cash – as he can’t borrow much more (money is locked into long term projects and banks have a limit of how much to lend per entity). This InvIT will be a way for IRB to take money, pay back back debt and move on. Banks get their money back and the risk is transferred to the investor in the InvIT.
Real estate is similar, and commercial real estate is where there are rental cash flows that are comparable.
India needs Rs. 26 Trillion (US $405B) for the infrastructure development by 2020, with about 80% of the funds needed for power, roads and urban infrastructure segments. InvITs are therefore given a tax-advantage in that the cash flows are nearly tax free to investors. More on that later.
Here are some of the very import InvIT regulations that SEBI has framed :
For the InvIT:
- The InvIT is allowed to raise funds from the public only if at least 80% of the value of its assets are in completed and revenue generating Infrastructure assets. The remaining 20% can come in through either under construction infrastructure projects or other tradable securities.
- The InvIT is allowed to invest only in infrastructure projects through the SPV or the Special Purpose Vehicle.
- The InvIT has to pay 90% of its Net Distributable Cash Flows to the unit holders.
- The regulator has set a minimum subscription size of Rs. 10 lakh per applicant while the trading lot is limited to Rs. 5 lakh. Considering IRB has set a price band of Rs. 100 to Rs. 102, this would mean that an investor needs to bid for a minimum of 10,000 units and in multiples of 5,000 units thereafter.
- The Capital Gains Tax treatment for the units of IRB InvIT: the short term capital gain tax will be charged at 15% and is applicable if the holdings are sold within a period of 36 months from purchase. (This might go down to 1 yr after the units are listed) Long term taxes have the inflation-indexation possible, like debt. (this is not an equity investment)
- There is no Dividend Distribution Tax (DDT) payable by the SPV to the unit holders of InvIT. And dividends are tax-free in investor hands (except if they get more than Rs. 10 lakh in total as dividends, when they pay 10% tax).
- Any “interest” received by the InvIT will be paid to investors and that interest is taxable in the hands of the investors as income.
Coming to IRB InvIT: The Six Road Pool
- IRB InvIT will own, operate and maintain a portfolio of six toll-road assets in the states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu.
- The six project SPVs comprise 3,635 lane kilometres of highways and have generated a revenue of Rs. 1,003.8 crore in FY 2015-16.
- Surat–Dahisar project (239 km)
- Tumkur–Chitradurga Project (114 km)
- Bharuch–Surat project (65 km)
- Jaipur–Deoli project (148.77 km)
- Omalur–Salem–Namakkal project (68.6 km) and
- Talegaon–Amravati project (66.7 km)
- The proceeds from the IRB InvIT IPO will be about Rs. 4,300 crore from fresh issue and another Rs. 1,000 crore from OFS. OFS is where current shareholders (IRB Infra) sell, but the fresh 4300 cr. is invested into the six toll projects.
- The projects will use the cash to pay off current debt on each project (which is at 9.5% to 10.5% interest rates) There is some leftover debt in each SPV but it’s tiny. Some of it will also be used to pay back debt taken by each project from IRB, and to buy out the equity portion also. IRB will get about 1700 cr. and the remaining goes to banks.
- The offer for sale comes from the current existing promoters IRB Infra Developers and its arms – Modern Road Makers, Aryan Toll Road, ATR Infra and Ideal Road Builders.
- The IRB InvIT price band is Rs. 100 to Rs. 102
- The trust says will offer 12% internal rate of return (IRR) to investors, 12% yield to Mutual Funds and 10% yield to HNIs post taxes. Note: They say this but we’ll explain why we doubt this is possible.
According to an interview, the valuation of the entire InvIT is about Rs. 5,922 Crore.
Side note: Is this good for IRB? Possibly, since their leverage falls, and the stock has risen quite a bit. It’s a good momentum story to play, but the fundamentals will be clearer only after their quarterly results. We’ll discuss this separately, and do connect in #stock-fundamentals on Slack.
Disclosure: No positions and no connections with IRB or the InvIT in any way by the author or Capitalmind.