Role of InvITs in Monetizing Power Sector

InvITs as an alternate source of financing for Indian infrastructure:

To achieve the target of $5 trillion economy size by 2025, a robust and resilient infrastructure system is required, supported by adequate private investments. Large increase in capital investments in the infrastructure sector will require significant Government push in the form of policy reforms including providing a conducive environment for public private partnership, and promoting alternate avenues of fund raising like Infrastructure Investment Trusts (InvITs) as well as a major increase in public sector spending which given the fiscal constraints can be achieved by way of asset monetization or asset recycling.

Assets such as land and buildings of two dozen PSUs identified for strategic sale, pipelines of GAIL, transmission lines of Power Grid Corp, telecom towers of BSNL/MTNL, a few airports of Airports Authority of India, ports and railways stations are among the targets for the proposed ‘asset recycling’/monetization. This will lead to a lot of money being realized from locked-up assets. Foreign funds prefer to invest in brownfield assets, as it is devoid of project risks.

According to ICRA (based on GOI manifesto), the next five years will see massive infrastructure build-up in India. The capital investment in the infrastructure sector has been proposed at $200 billion over the next five years - which is a huge increase from the current level of capital investment in the sector.

In the past, the entire infrastructure spend of the country has been either financed by banks or public spending, which results not only in asset-liability mismatches, but also in restricting the acceleration of new infrastructure development. This is exactly where InvITs have shown credibility to be the game changer for the infrastructure sector in India and transform the way infrastructure is financed in India. InvITs guidelines were issued by SEBI in 2014 with an objective of mobilizing capital for operating infrastructure assets in India and releasing capital for future investment in infrastructure.

The capital-intensive nature of power sector as a whole and substantial risk reduction post commissioning of project, InvITs are an ideal platform focused on operating transmission projects would provide a better investment opportunity for investors as well as lead to an optimum way to raise capital. This would also enable Indian infrastructure developers to release equity capital by selling operating projects to the InvITs and invest it in creating new assets.

This model works successfully because:

  • It allows investors like (FIIs, banks, insurance companies, pension funds, retail investors) to invest well governed yield generating operating assets with predictable cash flows and low volatility
  • It enables developers to invest more in the development projects and create more capacity

Globally the yield platform model has worked very well. Till date, there have been over 400 listings of similar instruments accounting for over $1 trillion of investments across the world. These instruments have assisted countries to meet their capital needs for the infrastructure and real estate sectors. Long-term infrastructure assets like roads, power generation, telecom towers, power transmission, warehouses, ports, gas pipelines etc. are owned by such platforms which offer investors stable income and growth for long-term. They are considered as high dividend-paying investments suitable for investors looking for long-term, stable cash flow with moderate capital appreciation.

In addition to the stable cash flows, such platforms grow by adding revenue generating operational projects and thus increasing the yield. Thus, it is quite the ideal investment option for investors looking for regular and steady income with a growth option.

What has worked well for InvITs:

Three aspects which make InvITs a credible asset class for investors- both domestic and foreign alike:

Low Risk

SEBI requires InvITs to invest at least 80 percent of their assets in completed and revenue-generating projects, and not more than 10 percent 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.

Stable Predictable Distributions

SEBI requires InvITs to distribute a minimum of 90 percent of their cash earnings to investors at least semi-annually. This can provide clear visibility to investors on cash flows and earn frequent distributions. Besides, the tax-efficient pay-outs maximize yield in the hands of investors.

A Robust Regulatory Framework

Stringent regulations and periodic mandatory disclosures have worked well and resulted in attracting global capital to India. SEBI with the perspective of safeguarding all stakeholders’ interest, has been proactive in implementing a strong and robust corporate governance as the foundation framework for this unique platform.

Some of the governance measures are:

  • InvITs are managed by an independent trustee and investment managers
  • The board comprises at least 50 percent independent directors
  • Compulsory half yearly valuation reports by independent valuers
  • Mandatory rating requirement and unitholders’ approval for incremental leverage
  • Mandatory unitholders’ approval for any new asset acquisitions
  • No voting by the sponsors in material related party transactions

Moreover, with a very pragmatic approach and in a bid to attract more investors to investment trusts, SEBI and RBI have made transformative amendments to InvIT regulations in the last year, giving them more flexibility to raise funds

  • The leverage limit for InvITs was raised from 49 percent to 70 percent of total asset value with stringent restrictions of maintaining AAA rating and 60 percent of unitholder vote by value
  • The trading lot value was significantly reduced from Rs. 5,00,000 to Rs. 1,00,000 in order to improve liquidity and depth of the market
  • FPIs were also permitted to invest in debt securities of InvITs by the MoF
  • Banks were enabled to lend to InvITs
  • ECBs were enabled for refinancing rupee loans at InvITs

Hence, 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 very safe bet and a compelling investment alternative in today’s uncertain times beset with high volatility.

Role of InvITs in monetizing Indian Power Sector:

InvITs have been quickly gaining momentum among institutional investors to help garner funds that would finance India’s increasing infrastructure investment needs, estimated to be Rs 50 trillion by 2022 to enable sustainable development in the country. Till date, there have been 6 listings of InvITs and REITs in last 3 years garnering around Rs. 70,000 crores of assets under management across Indian infrastructure projects ranging from roads, transmission, commercial real estate and gas pipelines with participation from marquee investors such as CPPIB, GIC, Brookfield, Blackstone, KKR, OMERs, Schroders, ACP, IFC and so on.

Global as well as domestic investors’ enthusiastic participation itself is a testimony to the robustness of the regulations around InvITs and speaks volumes about the confidence and trust this platform has induced globally amidst marquee investment managers as a credible vehicle to efficiently invest in operating infrastructure assets for the yields they seek.

Power Sector: InvITs not only offer developers a robust platform to divest their operating assets, but it also offers investors the ability to invest in stable operating infrastructure assets. This flow of capital could work wonders for the power sector, which is forecasted to attract investments worth Rs. 11.56 trillion between 2017 and 2022 in thermal, hydro, nuclear and renewable segments. We believe this is the most opportune time for InvITs in the power sector, offering a unique investment proposition in a sector that has traditionally witnessed a great degree of volatility and lack of attractive investment opportunities. Historically, there have been limited opportunities for owning power utility assets by investors and earn a regular annuity like dividend income. Imbibing the spirit of the world’s largest democracy, InvITs have the potential to provide an inclusive ownership of the nation’s power infrastructure to investors while earning a stable and growing yield.

Renewable Sector: Considering the fact that renewable assets typically give annuity-type returns and have low risk post commissioning of projects, their profile may fit InvIT investors requirements. Even globally, renewable business trusts/Yieldcos (dividend growth-oriented public companies) are one of the largest. InvITs offer a great way to monetize the operating renewable energy portfolio of assets which will enable the existing developers to plough back the capital to bid for new projects or de-lever. In addition, monetization to InvITs may also be beneficial to developers as InvITs do carry an advantage with respect to cost of capital and tax benefits. This has already successfully been done for sectors like road, power transmission and even gas pipelines by existing InvITs.

Global investors prefer to invest in operating infrastructure projects which earn stable yield. A successful market of InvIT will draw billions of dollars in the country from foreign institutional investors and provide the much-needed fillip for the development of the Power sector in India.

Outlook:

With the Indian economy and population both set to grow at impressive rates in the coming decades, it is imperative to ensure effective and timely roll out of infrastructure and the reforms that go with it. InvITs are a true win-win-win for investors-developers-India as they provide investors with a good long-term stable investment opportunity, opportunities for developers to deleverage and release locked-in capital to grow, and India to have incremental investment in underdevelopment infrastructure projects.  With the last two and a half years of track record of InvITs, we are confident what was envisioned and started with InvITs will become the norm of financing infrastructure in India for private as well as public assets. We remain optimistic this credible infrastructure financing alternative is a catalyst that will help spearhead India into a $5 trillion economy.

| Article published on 20/01/2020 by Moulin

 
 
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