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A week after the Union Budget gave real estate and infrastructure funds a tax pass-through status, the market regulator issued revised draft regulations for the launch of infrastructure investment trusts (InvIT) in the country.
InVITs — equivalent of real estate investment trusts (REITs) for the infrastructure sector — are aimed at providing a new financing stream for infra projects. Comments on the fresh draft rules are to be sent by July 24.
In the draft guideline, the Securities and Exchange Board of India (Sebi) said these instruments can raise capital from the public with a minimum issue size of Rs 250 crore. It has proposed that an InvIT can own up to Rs 500 crore in an underlying infra project.
The market regulator had in December last year issued a discussion paper on InvITs. The latest draft regulations kept in mind the public feedback on the earlier paper and also the various provisions in the Income Tax Act provided in the Budget.
GVK Power’s chief financial officer, A Issac George, said: “Infrastructure investment trusts should do very well if the taxation is taken care of. Most of the issuers are going to Singapore, as there is a single level of taxation there. We will have to see the fine print to comment on whether it will benefit us.”
The regulator has proposed that an InvIT which wants to invest 80 per cent of the assets in completed and revenue generating infrastructure assets or projects can raise funds through public issue of units.
The draft regulations differ from the discussion paper, as it has reduced the minimum subscription size to Rs 5 lakh from Rs 10 lakh earlier.
“The smaller subscription size would make it more accessible for investors and allow wider participation... The recent Budget announcements proposing the tax incentives for InvITs would be effective from October 1. This gives Sebi a narrow window to put the final regulations in place, and this could possibly be the reason behind a shorter public consultation period. It is likely that the final regulations for InvITs would be in place in the next month or two,” said Tejesh Chitlangi, partner at IC Legal.
In the draft regulations, the InvIT units should be compulsorily listed, even if offered through a public or are privately placed.
An InvIT that invests more than 10 per cent of assets in under-construction infrastructure projects needs to raise funds through private placement from institutional buyers. The minimum investment by institutional buyers and corporate groups is pegged at Rs 1 crore.
Before the units are offered, the InvIT would need to get strategic investors such as banks, international financial institutions or foreign portfolio investors, including sovereign wealth funds. These financial institutions would be required to invest not less than five per cent of the size of the InvIT.
Experts believe there is enough appetite in the market for the instruments especially after the grant of pass-through status.
“Infrastructure assets are attractive as an investment class because they also display characteristics where assets are generally difficult to replicate. From an investor’s perspective, the longevity and comparatively stable returns can be a welcome addition to any portfolio,” said Yogesh Chande, associate partner, ELP.
During the Budget speech, the finance minister had said InvIT would provide a new funding avenue for infra projects. “These structures would reduce the pressure on the banking system, while also making available fresh equity. I am confident these two instruments would attract long-term finance from foreign and domestic sources,” the FM had said.
By certain estimates, India requires investment in the infra sector of about Rs 65 lakh crore in the next five years.
