Why in news?
The initial public offering (IPO) for IRB InvIT, India’s first infrastructure investment trust fund will open for subscription.
What are InvITs?
- InvITs are similar to mutual funds.
- While mutual funds provide an opportunity to invest in equity stocks, an InvIT allows one to invest in infrastructure projects such as road and power.
How do InvITs work?
- InvITs raise funds from a large number of investors and directly invest in infrastructure projects or through a special purpose vehicle.
- Two types of InvITs have been allowed: One, which invests in completed and revenue generation infrastructure projects; the other, which has the flexibility to invest in completed or under-construction projects.
- InvITs which invest in completed projects take the route of public offer of its units, while those investing in under construction projects take the route of private placement of units.
- Both forms are required to be listed on stock exchanges.
How do InvITs help the developer?
- InvITs allow developers of infrastructure assets to monetise their assets by pooling multiple projects under a single entity (trust structure).
- For instance, IRB InvIT constitutes six special purpose vehicles consisting of toll-road assets aggregating to 3,645 lane kilometres of highways located across the states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu.
What is the structure of InvITs?
- InvITs are registered as trusts with SEBI and there are four parties — trustee, sponsors, investment manager and project manager.
- Sponsors are the firms which set up the InvITs.
- Investment managers manage assets and investments of InvITs and undertake activities of the InvIT.
- The project manager is responsible for executing the projects.
- The trustee oversees the role of InvIT, investment managers and project manager and ensures that all rules are complied with.
For which class of investors are InvITs suitable?
- The minimum application size for InvIT units is Rs. 10 lakh.
- The main investors could be foreign institutional investors, insurance and pension funds and domestic institutional investors (like mutual funds, banks) and also super-rich individuals.
What do InvITs mean to investors?
- According to SEBI rules, at least 90% of funds collected, after paying for expenses, taxes and repayment of external debt, should be passed on to investors every six months.
- Dividend income received by unit holders is tax exempt.
- Short-term capital gain on sale of units is taxed at 15%, while long-term capital gains are tax exempt.
- Interest distributed to unit holders is taxed.
What are the potential investment risks?
- InvITs are listed on and are subjected to the vagaries of the stock exchanges, resulting in negative or lower returns than expected.
- An economic downturn or project delays may hit infrastructure projects and result in lower returns.
- As in mutual funds, investors in InvITs have no control over investments and exits being made by the trust.
Source: The Hindu
