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What are INVITs?

If your Fund house will invest in InvITs, you need to know what they are. At its core, these are instruments meant to solicit money from the general public to fund the country's infrastructure building activities, be they building of roads, telecommunication towers or power plants. To keep things simple, let's stick to roads. A road building company, like IRB, needs money to build roads. Once the road gets built, it gets to collect toll and that becomes its income. But toll collection happens over a period of time. Meanwhile, the company had borrowed loans from banks to fund its projects, for which it pays a hefty interest to banks. This limits the company's capacity to undertake new projects. Is there a way that it can get money in an instant, pay off its debt and get onto projects?

Enter InvITs. These are trusts formed under the Sebi (Infrastructure Investment Trust) Regulation, 2014 that would solicit public money. Here's how it will work. The infrastructure company will form this trust and appoint an investment manager, just like a sponsor company sets up a mutual fund (a trust) and appoints an asset manager (the asset management company).

At the same time, the sponsor company has an on-going special purpose vehicle (SPV), which holds the underlying projects (roads built by the company). Remember, the SPV is an existing mechanism that many infrastructure companies use to house a specific infrastructure project and raise loans against the specific project in the SPV, thereby ring fencing the project and its liabilities from the rest of the company.

Once the InvIT raises money from the public, it gives the money to the SPV and takes a stake (at least 51% in the SPV as per rules). The InvIT becomes the SPV's largest shareholder. IRB InvIT Fund consists of six highways; it has built other highways too but they aren't part of this. However, new roads-as and when the company takes up new projects-would typically be hived off onto a new SPV, where the company's existing InvIT can take a stake. Think of an InvIT as an open-ended fund that will continue to exist. The SPV will now use this money and typically pay off its loans and be free of debt. Meanwhile, whatever tolls these highways would collect would go to the SPV, which would now mandatorily pass them (at least 90% of the toll earnings) on to the InvIT and the InvIT would pay dividends to its unitholders, including your mutual fund scheme if it has invested in it.

Are they risky?
That's the question that most fund managers are grappling with. For starters, they would need to estimate how much toll the underlying highways would collect (inflation levels in different years, for instance, would have a bearing on deciding the tolls) and the amount of traffic that would ply on the highway. For instance, 10 years down the line, if townships come up too close to the highway and a need is felt to create yet another bypass or expressway to further cut down the distance, the traffic on the InvIT's highways could drop. Traffic is unpredictable. So we are still evaluating and debating internally whether we should consider investing in InvITs. The income is variable, however our debt funds-like any other-invest in instruments that give fixed coupons. This fund house will take a call on InvITs at its upcoming board meeting.

A few years ago, Maharashtra Navnirman Sena, a state-level political party, had led widespread agitations across Maharashtra to abolish toll collection in certain specific toll plazas. InvIT investors would need to factor in such possibilities too.

Mutual funds would have the capability to understand InvITs better as the underlying asset is infrastructure projects which they already have exposure to.

As per Sebi rules, no individual mutual fund scheme can invest more than 10% of its assets in Reits and InvITs and not more than 5% in Reits and InvITs issued by a single issuer. Overall, a fund house can only invest up to 10% of its units issued with a single issuer of Reits and InvITs.

What should you do?
Invit is a new animal and it's too soon to exit a mutual fund just because it says it has decided to invest. It's possible that soon many fund houses may join the club. And just because they say they would invest, doesn't mean they will actually invest. But beware of misselling. The minimum investment in IRB InvIT is Rs 10 lakh. That's out of the reach for retail investors but not high net -worth individuals. It's possible for brokers to approach the latter. Unless you have the capability to analyse the income that the InvIT would earn, stay away or go through a mutual fund.

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This post first appeared on Prajna Capital - An Investment Guide, please read the originial post: here

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What are INVITs?


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