INFRASTRUCTURE INVESTMENT Risks, Returns and Perspectives

Q&A:

“Specific issues like terrains too will be taken while valuing InvITs”

The question-answer session during the discussion on Infrastructure funding brought forth many salient points. Some are given below.

Under the current guidelines, can a single InvIT have assets of one developer or do you need to pool the assets of multiple developers?
Sekar: The current guidelines allow for more than one sponsor, i.e., one party as a sponsor. Up to three parties can pool together and be a sponsor for InvIT. So, it does not have to be a single person. It could also be that one person is a sponsor but he pools together with other parties without designating them as sponsors. The only limitation could be that to offer for sale units or corresponding share, you will have to hold it for a year, which is very similar to how it works in the capital market.

Who evaluates the asset? Also, is there a plan to have a credit rating agency or some such body to rate the InvITs for the passive investors who cannot study the details? Or, is there any rating mechanism that will allow them to choose a way to invest?
Sekar: There is an extensive evaluation process. It takes place in two ways: 1) At the listing and, 2) On a continuous basis. SEBI has looked into both these aspects. An official valuer has to be appointed, and for publicly listed InvITs, the valuer will do the bi-annual evaluation. For privately placed InvITs, the evaluation will be annual. Apart from these, listing managers, book-runners, and underwriters will be appointed while the listing process is on. They will guide the developer on the evaluation. Since India does not have the history of yielding this sort of products, we are yet to discover the entire process.

Apart from the valuer, the debt on the InvITs will also be rated by the credit agencies. In fact, any debt above 25% of the assets has to have the approval of the credit rating agency. So, you can go up to 49% but that will also require the approval of the agency. Multiple safeguards have been put in place to protect the retail investors.

An investment trust is the mutual fund of an asset; it is not a mutual fund of financial investment. So that is the key difference between Mutual Funds and Investment debts.

Will the dividend payments be made from the cash flows or from the PAT of the InvITs?
Mahesh: If the InvITs choose to hold assets through special purpose companies (SPVs), they will be subject to The Companies Act. So they will have constraints of the usual Companies Act requirements of dividend being limited by PAT and also of distribution of the general reserve. But potentially, structuring could be done between the SPVs and the trust where the trust could have some debt component as well. It does not have to be equity entirely, there could be some debt and debt could be re-paid according to the rules of the Companies Act. There could be some tax issues where interest is taxable and the DDT is not applicable to the dividend. So to that extent, may be in the first two-three years or first five years when your depreciation is very high, it is better to use debt instrument. And after that, you switch over to more of the dividend instrument. So, there will be some structuring needed there.

Sekar: At the InvITs level, 90% of the free cash flows have to be given out to the unit holders as distribution.

So the dividend will vary on the basis of collections?
Sekar: Yes, if it is a toll road and an annuity project. In addition, InvITs also require you to transition into a new accounting standard. So the way you achieve the profitability and its measurement could be different.

Will the terrains, like hilly or desert terrain, affect the project?
Mahesh: The people, the valuers and the investors will look at the quality of individual road assets that go into the investment trusts. And if there are specific issues like terrain, it will be factored into evaluation. But remember that most of these are completed projects. So the cost of constructing these roads may not be a major factor but people may want to know about the operation and maintenance cost of these projects. So obviously, if there are tougher roads then people will expect larger provisions to be made in the financials for O & M and other factors.

How different is it from the mutual funds, debt fund and unit trust?
The key difference between the mutual fund and investment trust is that the MF holds underlying quoted financial instruments which are traded. The price of the financial instruments that a MF holds is known from the market. So if you buy a unit of say, HDFC MF, you know exactly how many shares, what kind of shares that one unit comprises. Because a fund is a 1000Cr fund where 10% will be invested in a ‘X’ company, 20% will be invested in a ‘Y’ company and so on and so forth. And the prices of the stocks of ‘X’, ‘Y’ and ‘Z’ companies are available in the market. An investment trust is the mutual fund of an asset; it is not a mutual fund of financial investment. So that is the key difference. Therefore, when you are looking at investment trust and its valuation, it will be value of the underlying asset and not the value of underlying instrument. And to find the value of underlying asset, somebody will have to do an exercise. As mentioned earlier, there will be valuer who will do valuation every six months of the assets and give the report.

Is there any difference in taxation?
Mahesh: The units of the investment trust are almost same as units of mutual fund. Other than the dividend distribution, tax has exemption, if the investment trust holds 100% of the company.

Sekar: From the investor’s perspective, all units of investment trust will be listed. The treatment is very similar to stocks/ equity shares. So long term capital shares are exempted and short term capital is essentially applicable as per the Act. It is very similar to equity mutual fund.