Harsh Shah, CEO, IndiGrid,
an infrastructure investment trust (“InvIT”) established to own inter-state power transmission assets in India. Harsh previously served as Chief Financial Officer at Sterlite Power. He has done MBA from the National University of France, in Finance and Strategy and MBA from the University of Cologne in Private Equity, Strategy and Economics. He has almost a decade of experience in the Finance sector. His specialties include Project Finance, Equity, Corporate Finance, Financial Planning &Analysis, Financial Control, internal controls Sectors: BFSI, Infrastructure Financing, Renewable Energy, Power, Power Transmission, Ports, Industrials. Some of the companies he worked with earlier includes, L&T Infrastructure Finance Co Ltd, AGNI Inc, and Procter & Gamble.
In an interview with Shweta Papriwal, Editor, Indiainfoline, Harsh Shah
said, “InvITs suit the investment objectives of insurance companies and pension funds. The investment cap of 5% for insurance companies while investing in a single InvIT is restricting participation.”
What is the objective of floating InvITs?
India needs to spend about Rs50 lakh crore ($778 billion) by 2022 for its infrastructure build-out, according to CRISIL estimates. Banks and non-bank lenders, already battling asset-liability mismatches and bad loans, cannot be relied upon for this investment. Meanwhile, infrastructure developers need to monetise their operational assets efficiently and churn the capital into under-construction assets. Therefore, an active corporate bond market is imperative, but conspicuous by its absence, leaving debt-laden developers with few options to refinance projects and recycle their locked-in capital.
This is where, in 2014, the Securities and Exchange Board of India (SEBI) introduced Infrastructure Investment Trusts (InvITs), a potential game changer for infrastructure financing. An InvIT is a trust registered with SEBI and listed on the Indian stock exchanges. It acquires the initial infrastructure asset portfolio of a sponsor/developer and issues units in lieu. It is a true win-win-win for investors-developers-India as it provides opportunities for investors to have a good long-term stable investment, developers to deleverage and release locked-in capital to grow, and India to have incremental investment in under-development infrastructure projects.
Explain how does this instrument works?
An InvIT is a hybrid instrument that owns and manages operational infrastructure assets such as roads, power plants, warehouses, ports and gas pipelines. Operating just like mutual funds, it collects fund from investors, or unit holders, to invest in such long-term revenue-generating infrastructure assets and earn risk-adjusted returns.
From a risk-return profile, InvITs provide an opportunity to own real infrastructure assets which provide predictable cash flows and dividends. Such platforms grow by adding revenue-generating projects and thus increasing the yield. Following are some of the salient features of an InvIT:
SEBI requires InvITs to invest at least 80% of their assets in completed and revenue-generating projects, and not more than 10% of their assets in under-construction projects. This ensures that InvITs are not exposed to some of the key risks inherent in the infrastructure sector like financial closure, regulatory approvals, time and cost overruns, etc.
Minimum 90% income to be distributed:
SEBI requires InvITs to distribute a minimum of 90% of their cash earnings to investors at least semi-annually. This can provide clear visibility to investors on cash flows and they, in turn, earn frequent distributions.
Robust corporate governance framework by SEBI:
InvITs are managed by an independent trustee and investment managers. They operate the assets on behalf of the unit-holders. The board of the investment manager comprises at least 50% independent directors. There are several other governance measures like half yearly valuation report by independent valuers, mandatory rating requirement, stringent disclosure norms as well as restricted voting by the sponsors in related party transactions.
What kind of returns can be made on InvIT investments?
Performance of InvITs is largely dependent on the underlying assets and stability of its cash flows. IndiGrid, which owns power transmission assets, has annuity like cash flows for 35 years with no price or volume risk. By virtue of their structure, InvITs offer superior risk adjusted returns and eliminate volatility through visibility on the cash flows of underlying assets. These factors make them a compelling investment alternative in today’s uncertain times beset with high volatility. The InvITs listed today offer cash yields upwards of 13% which puts them in the league of the highest dividend paying stocks in the country!
Low risk of investment in InvITs is evident from the fact that all the three InvITs - IndiGrid, IRB InvIT and Indinfravit, are rated AAA by CRISIL, India ratings and ICRA. The beta values of 0.22x and 0.20x for Indigrid InvIT and IRB InvIT respectively compared to NSE 500 also depict the inherent low risk in these instruments. In addition to being less volatile, IndiGrid has made stable and growing quarterly distribution per unit (DPU) since listing, which has been INR 18.56 till December 2018. This totals to an amount of ~INR 525 cr. distributed since listing by IndiGrid to its unitholders.
How is the interest among Indian and overseas investors for such offerings?
At the time of framing the regulations for InvITs, SEBI wanted to target this product for institutional investors thereby keeping the minimum lot sizes of Rs 10 lakhs and Rs 5 lakhs in primary application amount and secondary transaction amount, respectively. However, retail investors such as HNIs are understanding the product and its attractive risk adjusted returns. Case in point is InvIT of Indigrid where the retail investor participation has increased from ~15% to 25% as of December 2018. These curbs were attributed by the regulator to the lack of a long track record on account of the instrument’s fairly recent introduction in the market and a general lack of awareness among investors.
In addition to that, InvITs perfectly suit the investment objectives of insurance companies and pension funds as well, in terms of matching long dated assets and liabilities along with stable and diversified returns. This fact has been illustrated by the increase in insurance co holding from 7% during IPO to almost 11% currently, in spite of the current investment cap of 5% for insurance companies while investing in a single InvIT.
Also, long only FIIs with a ‘buy and hold’ strategy who had invested at the time of IPO have still remained so in the register as this product is perfect for global long-term investors who prefer to invest in operating infrastructure projects which earn stable yields. A cocktail of three factors -interest rates, capital appreciation and dividend income, is driving fund houses to bet on InvIT within specified limit. With the InvITs listed today offering upwards of 13% yields, it provides a compelling value proposition on a risk adjusted basis.
What has worked well for InvITs since listing?
InvITs have been successfully able to provide an alternate source of financing for the financially burdened Indian infrastructure, not only offering developers a robust platform to divest their operating assets, but also offer investors the ability to invest in stable operating infrastructure assets.
Secondly, InvITs are supposed to provide regular stable distributions (semi-annually as per regulations, but both listed InvITs provide quarterly distributions) over long term, providing an option to increase returns through acquisition of more assets. Whereas mutual funds don’t focus on distributions/yields. That apart, InvITs are listed products so option to exit is available compared to close ended mutual funds in which option to exit is only upon term maturity, which sometime ranges from 2-3 years.
In terms of return on investments, InvITs have an upper hand than traditional instruments like fixed deposits, PPF, EPF, Corporate bonds, where returns are low and capped. Although the equity market can potentially offer higher returns, equity inherently is embedded with much higher risk and volatility. With the InvITs listed today offering upwards of 12-13% yields, it provides a compelling value proposition on a risk adjusted basis. Thus, InvITs as an asset class provide a great option for portfolio diversification for retail investors as they are exceptional investment instruments for stability and predictable returns.
Lastly, long-term investors are investing, such as several Indian insurance companies, mutual funds, pension funds and corporate treasuries have subscribed to these instruments besides marquee foreign institutional investors in the three issuances till now.
What kind of favourable regulations are required to attract more investors?
The Indian government needs to facilitate the setting up of many more InvITs to ensure incremental investment in infrastructure sector and avoid NPAs because of delayed churning of assets. This will also help reduce the dependence on bank financing while also providing the financial community with a credible investment opportunity.
SEBI has recently hiked leverage cap from the current level of 49% of AUM to 70% of AUM. This is most welcome. However, there is further scope for increase that would support new issuances significantly and their development. A prerequisite for this higher leverage can be a base rating—like “AA+” by two or more rating agencies—and majority approval from unit-holders. This will ensure stability of the platform without increasing the risk to unit holders.
InvITs suit the investment objectives of insurance companies and pension funds. The investment cap of 5% for insurance companies while investing in a single InvIT is restricting participation. IRDA should increase the limit to 10%, in line with the limit prescribed by SEBI for mutual funds and its own cap for insurance companies while investing in listed equities.
Clarity from IRDAI on allowing insurance companies to invest in debt securities issued by InvITs in line with traditional companies will help issuers significantly. Similarly, PFRDA asks for a minimum rating of AA for the sponsor of an InvIT to allow participation by pension funds. Considering the fact that the InvIT is independent of its sponsor, the rating threshold should apply only to the InvIT.
Other than IndiGrid and IRB Infra, which other names can be expected in future?
Blackstone has teamed up with Embassy for launching India’s first REIT, while Reliance Infrastructure, ACME and ReNew Power are some of the firms that are coming up with their own InvITs in India in roads and renewable sector.
What is the road ahead for IndiGrid and InvITs as a category?
With regards to the policy changes that will have a profound impact on the development of InvITs market in India, it is significant that SEBI has recently increased the leverage cap to 70% of AUM. Increasing returns by acquiring more projects / assets is one of the core value propositions for investors to invest in InvITs. This step to increase leverage limit would benefit investors by improving returns and benefit infrastructure developers by incentivizing creation of more InvITs and allowing developers to monetise their infrastructure assets through InvITs.
Another proposal as part of the consultation paper calls for lowering the investment threshold for InvITs and REITs very substantially, for a big retail push. The existing norms for InvITs specify a minimum subscription amount of Rs 10 lakh and trading in their units in lots of at least Rs 5 lakh, while for REITs, the corresponding minimum threshold is Rs 2 lakh and Rs 1 lakh. This clearly discourages large-scale participation of retail investors. And the paper proposes reducing the initial/follow-on investment requirement for both InvITs and REITs to the range of Rs 15,000-20,000 for lots of 100 units, which does make perfect sense. We do need to popularize alternate investments like InvITs and REITs among retail investors.
In conclusion, InvITs are inherently highly regulated, low-risk products that adhere to robust corporate governance norms prescribed by SEBI, even higher than those for corporates. By virtue of their structure, they offer superior risk-adjusted returns and eliminate volatility through visibility on the cash flows of underlying assets. These factors make them a safe bet and a compelling investment alternative in today’s uncertain times beset with high volatility. The government and the regulators must do their utmost to ensure the success of InvITs, given the long-term potential of these instruments as alternative sources of infrastructure funding.