Indigrid Invit fund (Indigrid) is one-of-its-kind infrastructure fund. The irrevocable trust in accordance with the Trust Act, xxx, and is registered under Invit regulations. The purpose of Invit in the power sector is to own interstate power transmission assets in India. Established on October 2016, Indigrid is the first Invit from the grid sector to tap the growth potential of Indias power transmission industry.

Indigrid is sponsored by Sterlite Power Grid Ventures, a leading independent power transmission company in the private sector with extensive experience in bidding, designing, financing, and construction and maintaining the power transmission projects across India. The sponsor owned 11 inter-state power transmission projects, with a total network of 30 power transmission lines of about 7,733 circuit km (ckm) and nine substations with 13,890 MVA of transformation capacity end March 2017. Some of these projects have been fully commissioned, while others are at different stages of development.

Of the 11 interstate power transmission projects owned by the sponsor, IndiGrid will initially acquire two projects, i.e., Bhopal Dhule Transmission Co Ltd (BDTC) and Jabalpur Transmission Co Ltd (JTC), together comprising the initial portfolio of assets (IPAs), with a total network of eight power transmission lines of 1,936 ckm and two substations with 6,000 MVA of transformation capacity across four states.

Under the National Tariff Policy, 2006, the government has emphasized competitive bidding for new transmission projects by introducing the tariff-based competitive bidding (TBCB) scheme for all transmission projects. As many as 38 interstate transmission projects were awarded through tariff-based competitive bidding system end February 2017. The sponsor has a market share of 29% among the TBCB projects. The sponsor has won projects with a maximum line length of 7,733 ckm and 13,890 MVA of transformation capacity across 15 states.

Each IPA was awarded to the Sponsor under TBCB scheme on build-own-operate-maintain (Boom) basis. Revenues are being generated for more than a year. All portfolio assets awarded to Indigrid will be on Boom basis for up to 35 years with a useful life of 50 years.

The Offer details

The units are offered at a lower price of Rs 98 and at higher price of Rs 100 each unit. Minimum application is for 10,205 units (i.e., Rs 10 lakh plus) and in multiple of 5,103 units (Rs 5 lakh plus). The issue opens for subscription on 17 May and closes on 19 May, with anchor bid to open on 16 May. Each unit will have a face value of Rs. 100 each. Post listing, the trading lot will be of 5,103 units. The units will be listed on the BSE and the NSE.

The issue comprises fresh issue of Rs 2250 crore, with an option to retain 25% of the offer size oversubscription. The sponsor will hold all units for one year and at least 15% of the outstanding units for three years after the completion of the issue.

The IPO proceeds will be utilized for repayment of loans and debts of Rs 1600 crore. Rest will be for other investment purpose.

Regulations regarding the fund

Under the regulatory guidance, the trust will have the right of first refusal to acquire the sponsors existing operational and future assets. It can purchase non-sponsor assets as well, as per its investment strategy.

The trust has certain other regulatory conditions before deciding on the investments. These include investing at least 80% of the value of the assets in completed and revenue-generating infrastructure assets and the balance 20% in under-construction infrastructure projects and securities of infrastructure companies in India. It cannot invest in units of other Invits).

The investment in Invit will offer returns to the unit holders in form of dividend and interest.

Dividend distribution tax is required to be paid by the Invit while distributing dividend to non-institutional unit holders from the income generated from the core business.

If the units are sold within three years, short-term capital gains tax of 15% will be applicable. There will be no capital gains tax on sale of units beyond three years.

Other conditions for distribution of cash flows include distributing at least 90% of the distributable cash flow of the IPA to the Invit and at least 90% of the distributable cash flow of the Invit to the unit holders. Dividend has to be paid within 15 day. Distribution of the dividend to the unit holders is to be half yearly.

The aggregate consolidated borrowing of IndiGrid is capped at 49% of the value of Invit assets.

An approval from all unit holders to delist the trust has to be taken. Votes cast in favour of delisting have to be not one-and-half times more than the vote cast against the resolution.

The trust is required to have and maintain a minimum of 20 unit holders forming part of the public. Each holding should not be more than 25% of the aggregate amount of the units on a post-issue basis. Failure to do so will result in delisting of the units by the regulator.

Regulations governing assets

Indigrid will have right of first offer (ROFO) for the eight of the nine remaining assets of the sponsor comprising 21 transmission lines with a total circuit length of around 4,831 ckm. The ROFO for these eight projects will last for seven years from the day of listing of the units.

For the rest of the projects, ROFO will be offered within 36 months from the scheduled commission date (COD) of the asset. Further, prior approval of the unit holders will be required at the time of any purchase or divestment of assets

The sponsor can only sell to third party at an equity value that is at least 10% higher than IndiGrids offer.

Regulations governing the tariffs

Tariffs of the transmission projects comprise fixed and variable components and are billed, collected and paid through the point of connection (PoC) mechanism.

The variable component is linked to the inflation index in India published by the Central Electricity Regulatory Commission every six months. In addition, there is also an incentive based on availability, irrespective of the quantum of power transmitted through the transmission lines. As per the terms of the respective transmission services agreements (TSAs), BDTCL and JTCL are eligible for incentive payments if annual availability is more than 98%. There is penalty if the availability factor falls below 95%.

The tariff for inter-state power transmission projects in India including the IPAs is contracted for the period of the TSA, which is up to 35 years from the from the COD of the asset. It may be renewed in accordance with the TSA and the Electricity Act, 2003. With periodic maintenance, the assets will have a useful life of 50 years.

Tariffs under these TSAs are billed and collected as per the PoC mechanism, a regulatory payment pooling system offered to inter-state transmission systems (ISTS) such as the systems operated by the IPAs. Under the PoC mechanism, payments are made to a central payment pool and the proceeds are distributed proportionately to all transmission services providers such as IPAs.

Valuation

The issue is the first initial public offer of units of an infrastructure investment trust in the power transmission sector registered under the Invit Regulations in India. There are no listed infrastructure investment trusts in India. Hence, no comparison is available for issue price and valuations.

Around Rs 3.1-trillion investment is planned in the power transmission sector over the next five years. All new power transmission projects will be bid under the TBCB process. Schemes such as Uday and Power for All and focus on renewable transmission will boost the growth of the Indian transmission sector.

The widening inter-regional power demand-supply gap, government support, modernization of existing transmission lines, capacity addition for conventional power generation capacities and focus on renewable and cross-border power trading will drive transmission capacity additions in India. Indigrid is positioned to take advantage of the potential of Indias power transmission industry due to its financial position, support from sponsor and the robust regulatory framework for power transmission in India.

Further, IPAs enjoy robust payment mechanism and low counterparty risk owing to the PoC mechanism, thereby providing steady future cash flows and minimal counter-party risks.

IPAs have no ability or flexibility to charge more for regulated services, other than what is provided for, under the relevant tariff. They have to bear any adhoc accidental operating costs. Further, any change in regulatory parameters by the regulatory authority, particularly related to tariff, payment pooling and dispatch regulations, might have a material adverse effect on the business, prospects, financial condition, results of operations and cash flows of the IPAs.

Overall, to sum up, stable cash flows from assets together with growth opportunity through a pipeline of eight assets, initial low leverage and high distribution of profit will benefit investors.

A successful Invit listing for Indigrid opens up a window for other power transmission projects to exit completed projects and churn their equity or deleverage their balance sheets.

Returns to unit holders

Based on the projected cash flows given in the prospectus, the Indigrid fund expects to yield tax-free dividend of around 7.5% (after deducting dividend distribution tax) annually to non-institutional investors, subject to the projected cash flows materialising. Plus, there might be 4-5% capital gains from growth assets, resulting in total post-tax returns of around 11.5% for individuals. The total returns could be 14-14.5% post tax for institutional investors.

However, there is no guarantee of returns. Returns are not fixed and will vary deepening on the actual cash flows.

Capital gains from the units are possible if post listing investors are willing to buy the units from the market at a lower yield due to the prevailing lower interest rate regime. However, in a rising interest rate scenario, there might be capital losses if investors try to exit by selling the units in the market.

There can also capital gains if the projects perform better than the projections, thus yielding higher-than-projected returns and vice versa.

Capital gains are possible if the fund is able to raise debt at lower interest rates and is able to acquire higher internal rate of return (IRR) projects.

Capital losses as well as lower yields will accrue if any of the funds projects face any problem and suffers losses or gets lower cash flow than expected.

Even after the concession period of a particular project is complete, the fund is free to acquire any project from the sponsor or from a non-sponsor and can leverage its balance sheet and raise debt at levels lower than its IRR to generate better returns for unit holders.

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