Question

Given the challenging phase in infrastructure financing in the country today, infrastructure Investment Trusts (InvITs) are supposed to provide a suitable structure for financing and refinancing of infrastructure projects in the country. Substantiate.

Answer 1

Approach:

• Give a brief introduction about infrastructure Investment Trusts (InvITs).
• What are the important Types of InviTs
• Write how How InvITs can facilitate investment in the infrastructure sector.

Infrastructure Investment Trusts (InvITs) are mutual fund like institutions that enable investments into the infrastructure sector by pooling small sums of money from a multitude of individual investors for directly investing in infrastructure so as to return a portion of the income (after deducting expenditures) to unitholders of InvITs, who pooled in money.InvITs can invest in infrastructure projects, either directly or through a special purpose vehicle (SPV).InvITs are regulated by the securities market regulator in India- Securities and Exchange Board of India (SEBI).The objective of InvIT is to facilitate investment in the infrastructure sector in India.

Types of InviTs
Two types of InvITs have been allowed, one which is allowed to invest mainly in completed and revenue-generating infrastructure projects and other which has the flexibility to invest in completed/under-construction projects. While the former has to undertake a public offer of its units, the latter has to opt for a private placement of its units. Both the structures are required to be listed.

How InvITs can facilitate investment in the infrastructure sector:
Several existing infrastructure projects which are under development in India are delayed and ‘stressed’ on account of varied reasons including increasing debt finance costs, lack of/locked up equity of private investors in projects which precludes them from undertaking new projects, lack of international finance flowing to Indian infrastructure projects, project implementation delays caused by various factors like global economic slowdown, cost overruns, inability of concessionaire to meet funding requirements on time, etc.

InvITs, as an investment vehicle, may aid:

• Providing wider and long-term refinance for existing infrastructure projects.
• Freeing up of current developer’s capital for reinvestment into new infrastructure projects.
• Refinancing/takeout of existing high-cost debt with long-term low-cost capital and help banks free up/reduce loan exposure, and thereby help them create headroom for new funding requirements.

There are several infrastructure companies whose funds are locked up in completed/substantially completed infrastructure projects which can otherwise be used for furthering infrastructure development in the country.
InvITs may be an enabling vehicle for refinancing stressed assets as well as creating an investment option which may otherwise not be possible for smaller investors.
InvITs may help in attracting international finance into Indian infrastructure sector.
InvITs will enable the investors to hold a diversified portfolio of infrastructure assets.
InvITs are also proposed to bring higher standards of governance into infrastructure development and management and distribution of income from assets so as to attract investor interest.

Given the challenging phase of infrastructure in the country today, InvITs are proposed to provide a suitable structure for financing and refinancing of infrastructure projects in the country.