Infrastructure Investment Trusts

Infrastructure Investment Trusts or InvITs are entities that accumulate money from institutional investors and individuals to invest, particularly in under-construction infrastructure or cash-generating projects. This collective investment vehicle aims to expedite investment in a country’s infrastructure sector to achieve overall economic growth. Moreover, it tries to provide investors with a steady income stream.

This trust invests in infrastructure assets, such as power distribution networks, fiber optic networks, telecom towers, roads, etc. InvITs may also allocate a small part of the pooled funds to liquid securities, like equity and money market instruments, for the purpose of cash management. Based on fund source, InvITs are of two types — public-listed and privately held.

• Infrastructure Investment Trusts refer to trusts sponsored by infrastructure development companies. These investment vehicles collect funds from different investors to invest in multiple infrastructure projects.
• These investment instruments aim to foster investment in the infrastructure sector, boosting economic development. Their structure includes 4 key components — sponsor, trustee, project manager, and investment manager.
• Public-listed and privately-held are two kinds of InvITs based on the source of money.
• The best infrastructure investment trusts offer an extensive range of benefits, for example, high-quality assets, high liquidity, portfolio diversification, steady income streams, etc.

Infrastructure Investment Trusts are pooled investment vehicles that allocate the corpus to real infrastructure assets, for example, transmission lines, pipelines, power plants, and more. One of the key goals of this investment instrument is to promote the infrastructure sector of an economy by encouraging different institutional investors and retail investors to put their money into it. Like mutual funds, these investment vehicles have designated managers who invest the corpus in income-generating assets.

Simply put, InvITs own and operate infrastructure projects that generate revenue. Such assets generate cash flow, which the investment vehicle distributes among the investors as dividends. The cash flow generated is stable, ensuring predictable, low-risk returns for investors like debt instruments. Also, the assets’ growth potential results in capital appreciation like in the case of equity.

Let us look at some key features of these investment vehicles to better understand how they work.

• The investment is generally for the long term. This is because, typically, the underlying assets also have long-term contracts.
• A key purpose of InvITs is to reduce the infrastructure sector’s under-construction risk.
• The growth potential concerning InvITs is usually high because they keep adding operational projects to the trusts, which leads to a higher yield.

InvITs can invest the pooled funds directly or via special purpose vehicles (SPVs), which classifies them into the following two categories:

• Investment In Income-Generating Finished Projects: In this case, the underlying assets are finished projects that generate revenue. Such InvITs invite investors via a public offering.
• Investment In Under-Construction Projects:  Here, the underlying assets include under-construction projects. Such investment vehicles collect funds from investors via private placement.

Thus, on the basis of the source of money, there are two kinds of InvITs, as noted above.

• Privately-Held InvITs: Such InvITs are not listed on any stock exchange. This means one cannot purchase the units of these investment vehicles on a stock exchange like the New York Stock Exchange or NYSE. A limited number of institutional investors and individual investors hold the units of such InvITs privately.
• Public-Listed InvITs: Once the listing of InvITs takes place, they become public-listed InvITs. Institutional and retail investors can purchase units of such InvITs on stock exchanges.

The process of forming an InvIT involves the following steps:

1. The first step involves becoming a sponsor. Note that any infrastructure development organization can become one.
2. Next, the sponsor must appoint a trustee and find a collection of revenue-generating infrastructure assets.
3. The sponsor creates a trust, which is often an SPV, to hold all the assets. This SPV turns into an InvIT. Then, its registration takes place.
4. Once the sponsor completes the appointment of a trustee, the former cannot manage the InvIT’s assets anymore. The trust owns and directly manages the assets. Alternatively, an InvIT may have indirect control over the infrastructure assets on the trust’s behalf. However, for this, the InvIT needs to keep a minimum of 50% stake in the SPV.
5. Next, the trustee must appoint two managers — a project manager and an investment manager. The latter needs to ensure that the trust’s existing investments deliver optimal returns. Moreover, the investment manager needs to make the right investment decisions that can help grow the trust’s assets. That said, the project manager needs to manage all infrastructure assets on the rust’s behalf, making sure that the under-construction projects are completed on time.
6. Once the registration of the InvIT and the appointment of the two managers are complete, the listing of the investment vehicle on stock exchanges can be done. This way, the InvIT can raise funds from the public through the sale of its units.

Let us look at the four key elements constituting the structure of InvITs to understand this type of investment vehicle better.

• Sponsor: In most cases, sponsors are infrastructure development organizations that originally developed, owned, or/and managed the trust’s infrastructure assets. Note that regulatory authorities may have a cap on the number of sponsors in a structure.
• Trustee: In this case, a trustee is an organization with a history of offering trusteeship services. Any trustee's vital responsibilities include holding the InvIT's assets in trusteeship for safeguarding the unitholders’ interests. Other duties include timely dividend distributions among unitholders and governing InvIT managers’ activities.
• Investment Manager: An investment manager is an organization that is responsible for supervising an InvIT’s investments, activities, and assets.
• Project Manager: In the structure of an InvIT, a project manager is an individual responsible for supervising all activities related to a project. Moreover, they ensure the timely execution of the project per the agreement. Sometimes, project managers may also be responsible for the execution concerning ancillary project-related activities. 

Let us look at a few infrastructure investment trust examples to understand the concept better.

Example #1

Suppose DBC Yield Plus Trust is an Infrastructure Investment Trust in India with total assets under management or AUM worth 1,00,000 crore. The investment vehicle accumulates funds and invests the pooled money in different real infrastructure assets, for example, roads and highways, railways, power generators, and more. It aims to provide investors with a diversified portfolio of finished infrastructure projects that generate stable cash flows.

Such stable cash flows enable the trust to pay its investors a consistent dividend income. Moreover, the portion of equity investments in DBC Yield Plus Trust’s portfolio offers significant capital appreciation to the unit holders. Institutional investors, Individuals who want to make stable returns and get some exposure to the growth potential of equity, typically invest in it.

Example #2

In November 2023, the Securities and Exchange Board of India, the capital market regulator in India, revised a manner in which Infrastructure Investment Trusts can fulfill their minimum requirements with regard to public unitholding. This new technique will involve issuing units via preferential allotment. That said, only those units that InvITs issue to the public will be taken under consideration for compliance concerning the requirements.

This investment instrument provides two types of returns to its investors — capital gains and dividend income. Both are subject to distinct taxation in India. Let us look into it.

• Capital Gains Taxation - Investments of up to 3 years are subject to short-term capital gains or STCG tax rules, and the tax rate is 15%. This means if an investor sells their units after 3 years from the date of purchase, a 15% STCG tax rate will be applicable to the gains.

On the other hand, capital gains earned after selling units owned for over 3 years are subject to 10% long-term capital gains or LTCG tax. That said, note that LTCG of up to ₹1 lakh is tax-free.

• Interest And Dividend Income Taxation - Interest or dividend income earned from InvITs is taxable per the person’s income tax slab rate.

Let us look at the benefits and limitations of infrastructure investment trusts.

Advantages

• These investment vehicles allow investors to diversify their portfolios, which, in turn, mitigates portfolio risk.
• InvITs can provide retail individual investors with regular income through dividend payments.
• Designated fund managers manage InvITs. Access to professional management can help ensure optimal returns for investors while ensuring that they face minimal hassles.
• Investors can earn income in the form of capital gains after selling their units in InvITs at a profit.
• The best infrastructure investment trusts have assets of high quality. They are typically associated with low risk with regard to price and demand.
• Exiting any InvIT is like selling any equity investment. This makes such investment vehicles highly liquid. Note that they do not come with any lock-in period.

Disadvantages

• The financing of infrastructure projects primarily happens via debt, envisaging fluctuating interest rates and large bullet repayments. These two elements can expose InvITs to a refinancing risk.
• Since market participants trade InvIT units on stock exchanges, their price fluctuates. As a result, this investment vehicle poses a returns risk.
• InvITs carry operational risks. This is because force majeure events impact the underlying infrastructure projects’ availability and have an adverse effect on income. Note that there are other operational risks as well, for example, tariff risk, ad hoc expenses, and collection-related delays.

Some key differences between Infrastructure Investment Trusts and Real Estate Investment Trusts or REITs are as follows:

• Real estate investment trusts or REITs predominantly allocate funds to properties generating stable income streams, for example, rental income. On the other hand, InvITs allocate their corpus to assets generating cash flows from tariffs, tolls, or usage fees. 
• REITs offer a diversified portfolio of real estate properties. On the other hand, InvITs put money into infrastructure projects that can be subject to different regulatory and operational risks.
• REITs invest their funds in under-construction and real estate projects. On the other hand, InvITs invest in under-construction or finished infrastructure projects. 

This article has been a guide to what are Infrastructure Investment Trusts. Here, we explain its types, how to form it, structure, taxation, examples, and advantages. You may also find some useful articles here -

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