Securities and Exchange Board of India (SEBI), the Indian capital markets regulator, approved the introduction of REITs and InvITs as a new source of funding for the cash-strapped real estate and infrastructure sectors. It added some more regulations in September 2016 to make these instruments attractive and to add to products like mutual funds, ETFs and AIFs as an additional category for investors. So far, only two companies – IRB and India Grid have floated InvITs and no listed REITs exist yet.
An InvITs offers an opportunity to promoters of projects to sell their stake in completed projects to the trust, which, in turn, can raise long-term and tax-free funds from unit holders. Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are innovative vehicles that allow developers to monetise revenue-generating real estate and infrastructure assets, while enabling investors or unit holders to invest in these assets without actually owning them.
What is an InvIT?
An infrastructure investment trust (InvIT) is a pool of funds collected from many institutional investors for investing in completed infrastructure projects to earn from regular dividends. InvITs invest in infrastructure building activities such as roads, telecommunication towers or power plants.
InvITs can invest in infrastructure projects, either directly or through a special purpose vehicle (SPV). Stock exchanges list units of InvITs on their platform for trading activities like a stock. These units are neither fully equity nor debt instruments; instead, it is a combination of both- Hybrid. While the periodic cash flows through dividends gives InvITs units a debt like flavor, the mark to market gain component through stock exchanges gives capital appreciation to a certain extent.
Structure of an InvIT
There are four important parties to an InvIT — sponsors, investment managers, project managers and the trustee. InvITs are formed by complying with the Sebi Infrastructure Investment Trust Regulation, 2014. The infrastructure company interested in getting funds from the public will, therefore, form this trust, and then appoint an investment manager who will be responsible for how the assets and investments of the InvIT are managed.
The sponsor has to hold a minimum 15 per cent of the InvIT units with a lock-in period of three years
Who can invest?
Only institutional investors and HNIs can invest in units of InvITs as the minimum ticket size is Rs.10 lakh. After listing, the minimum ticket size is Rs.5 lakh. Currently, SEBI has allowed banks, mutual funds and insurance companies to invest in InvITs.
SEBI has mandated InvITs to distribute 90 percent of net-distributable cash flows every six months making it an attractive investible instrument.
How much they Institutions invest
SEBI rule allow fund houses to invest up to 10% of NAV in REITs and InvITs. Fund houses can invest up to 5% in single issuer. Similarly, insurance companies can invest up to 3% of the fund size in these instruments.Banks can invest up to 10% of the unit capital in REIT or InvIT.
REITs and InvITs enjoy favourable tax treatment, including exemption from dividend distribution tax and relaxation of capital gains tax.
Currently, the dividend income that is distributed by these trusts is exempted from tax.
In addition, government has exempted long-term capital gain tax (LTCG) in InvITs if the security is held for over 3 years. Short-term capital gain tax is 15% in InvITs. Capital gain tax is applicable only if the investors pay securities transaction tax (STT).