India's first InvIT IPO by IRB recently closed for subscription with an over subscription of over 8.5 times. The InvIT structure is new in India and promises to be a game changer for the Indian infrastructure segment. Billions of dollars that are currently stuck in unfinished infrastructure projects and unviable segments can now be monetized. This could be a big push to infrastructure. Close on the lines of the IRB InvIT there are other marquee names like Reliance Infrastructure and MEP Infrastructure who are also in the race.
Understanding the power of bunching SPVs
Typically, infrastructure projects are implemented via the Special Purpose Vehicle (SPV) route. A typical infrastructure company has about 7-12 SPVs under their ambit. At an individual level, it is very difficult to find investors in individual SPVs as the project concentration risk is too high. However, if different SPVs are bunched together and a portfolio of infrastructure projects are created, then it is much easier to get investors to participate. Institutional investors typically find this diversified portfolio a lot more attractive to invest and less risky. That is exactly where InvITs fit in and that is why the IRB InvIT as the first Infrastructure Investment Trust coming out with an IPO so important. For large institutional investors like pension funds, insurance companies and sovereign funds with very long term liabilities, such a diversified portfolio of long-term infrastructure assets gives them the benefit to earning higher annuity income with lower levels of risk.
What you need to know about the IRB InvIT IPO?
The IRBI InvIT, which closed for subscription on Friday, was oversubscribed by 8.57 times. There was a strong appetite shown by institutional investors and non-institutional investors (HNIs and corporates). While the QIB issue was oversubscribed by 10.81 times, the non-institutional portion was oversubscribed by 5.89 times. The retail participation was largely limited as the InvIT mandated a minimum application size of Rs.10 lakh, as mandated by SEBI. Since the InvIT regulations have been placed under the jurisdiction of SEBI, this product will be monitored by SEBI on a continuous basis. What investors in the InvIT must remember is that this product is like a mutual fund and not like an equity share. Hence the valuation and pricing parameters will also be like a mutual fund. That is something that investors need to be cognizant of. This InvIT can invest in infrastructure projects either directly or through the SPV route. However, any project that is being implemented on a Public Private Partnership (PPP) basis must be only through the SPV route. The InvIT can invest either in completed projects or even in projects that are under implementation.
Understanding the potential for roads infrastructure in India
India has one of the largest road networks in the world comprising of nearly 3.35 million kilometres of roads. The irony, however, is that the national highways carry nearly 40% of the total road-based traffic but constitute only 2.9% of the total roads network. Therefore, that is where the big opportunity lies.
The above chart clearly indicates that the real shortfall lies in national highways and, probably, in state highways. This becomes all the more important once GST is launched. One of the big advantages of the Goods and Services Tax (GST) is that it will create a national market for goods and services. However, this entire exercise of GST may not yield results if domestic infrastructure, in the form national and state highways, is not up to the mark to provide seamless last-mile connectivity. That is exactly where the InvITs have a major role to play.
How will IRB InvIT allocate its funds to projects?
The InvIT will invest in the 6 key SPVs of IRB Infrastructure Ltd. These 6 projects put together currently have an enterprise value of Rs.7050 crore. Therefore the investor will get a diversified portfolio of projects in their portfolio largely de-risking the variances in cash flows. The proceeds of the InvIT IPO will of around Rs.4200 crore be largely used to repay the debt of the SPVs, which will make them largely debt-light and increase their ability to leverage the project in future. In all these cases, the amount will be given as a loan by the InvIT Trust to the SPV. The advantage of the InvIT route is that it frees up cash flows that are locked up and allows the infrastructure company on operating the infrastructure rather than managing the capital. That is the big advantage of the InvIT.
Finally, important tax implications of the IRB Infrastructure InvIT
Here are 3 things you need to understand about the InvIT tax structure..
From the SPV point of view, the interest paid on loans from InvITs will not be subject to withholding tax at the SPV level. Also if the InvIT holds 100% interest in the SPV, then the dividends are also not subjected to Dividend Distribution tax (DDT).
From the InvIT point of view, any dividends or interest received from the SPV will be entirely tax-free. This was recently approved by the IT department to respect the pass-through status of the InvIT. However, capital gains on sale of assets will be taxable in the hands of the InvIT.
Lastly, we come to the unit-holders perspective, who invested in the IRB InvIT as part of the IPO. Interest on units will be taxed at their peak rates, as in the case of FDs. However, any dividends distributed by the InvIT are entirely tax-free in the hands of the investors. The definition of capital gains in case of InvITs will be a holding period of 3 years. While long-term capital gains will be entirely tax free, STCG will be taxed at a concessional rate of 15%.
The IRB InvIT is a start in the right direction. One only hopes that it addresses the huge gap in infrastructure funding and helps infrastructure companies better monetize their assets.
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