InvIT Funds: New Way to Raise Infra Funds?

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Mutual fund houses in India traditionally invested only in equity, debt and gold instruments.

However, there is a new kid on the block - InvITs (infrastructure investments trusts).

In February 2017, the capital market regulator, Securities Exchange Board of India (SEBI), allowed mutual funds to invest on InvITs. Subsequently, India's first InvIT, IRB InvIT Fund (sponsored by IRB Infrastructure Developers Ltd) was launched late in April this year and plans to call for bids between 3 and 5 May 2017.

According to an article in The Mint, at least three of the major mutual fund houses have expressed interest in investing in InvITs, with the IRB fund being the first of the lot.

As major fund houses have signaled their intent to invest in InvITs, it becomes imperative to understand what exactly are InvITs.

Let us understand...

At its core, InvITs are instruments meant to solicit money from the general public to fund the country's infrastructure building activities, be they building of roads, telecommunication towers or power plants.

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.

An InvIT is registered with the SEBI as a trust. The first such instance of a trust is the IRB Fund.

To better understand the role of InvITs, let us look at an example.

A road building company needs money to build roads. After the road building is complete, the company collects toll, which is its income.

However, toll collection happens over drawn out periods of time, and in addition the company requires enormous debt to fund the initial project cost. This limits the company's capacity to undertake new projects, as the debt needs to be serviced by hefty interest.

This is where InvITs come in.  These are trusts formed under the SEBI (Infrastructure Investment Trust) Regulation, 2014 that would solicit public money.

So, how do InvITs work?

An infrastructure company already has ongoing special purpose vehicles (SPVs), i.e. the underlying projects which the company intends to fund.

Once the InvIT raises money from the public, it gives the money to the SPV and takes a stake (at least 51% in the SPV as per rules). The InvIT becomes the SPV's largest shareholder.

The SPV will now use this money and typically pay off its loans and be free of debt. Meanwhile, whatever tolls these highways would collect would go to the SPV, which would now mandatorily pass them on to the InvIT.

InvITs allow developers of infrastructure assets to monetise their assets by pooling multiple projects under a single entity (trust structure).

For InvIT investors, the returns would be in the form of dividends to its unitholders, including mutual fund schemes if they have invested in it, interest and buybacks.

As per 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.

What are the 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

SEBI has put a minimum investment limit on InvITs. Investors are eligible to take exposure to InvITs with a minimum investment of Rs 1 million.

Clearly, with this kind of cap, SEBI seems to be discouraging retail participation possibly because it is a new product and the understanding to evaluate performance is limited as of now.

However, if the current IRB issue finds enough takers, then more infrastructure developers would opt for this route to raise money.

Apart from the IRB Fund, Reliance Infrastructure, Sterlite Power Grid Ventures and other infrastructure firms are also gearing up to unveil InvITs.

As InvITs are a new investment vehicle, there is no clear way of measuring performance, nor is there a way to gauge past performance. It would be interesting to see if they catch on to mainstream investors in the long run.

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