InvIT Pipeline Strong, Needs Conducive Tax Regime: ICRA

Over the next five years, the InvIT pipeline is estimated to growth to Rs. 2-lakh crore including Rs. 80,000 crore in the next one year itself, according to ICRA.

While full tax exemption to sovereign funds could attract these funds, the overall impact of higher tax incidence for unit holders may play spoilsport.

However, for InvITs to succeed, a conducive regime is the key and much would depend on regulatory and tax regime.

Assets from roads, telecom fibre, power transmission and generation are expected to be on the block. The most keenly watched would be National Highway Authority of India (NHAI) InvIT, given its size and track record of operational toll road projects.

Till date, Rs. 22,000 crore have been raised from the investors through InvITs, while another Rs. 32,500 crore is in advanced stages. Tower Infrastructure of Reliance Jio, a second InvIT from IRB — privately placed with GIC — and acquisition of eight road assets by L&T’s IndInfravit from Sadhbav are the ones in advanced stages.

Shubham Jain, Senior Vice-President, ICRA, says, “InvITs are an attractive vehicle for developers to unlock capital deployed in operational projects and helps in reducing the cost of debt for infrastructure projects. Foreign institutional investors find InvITs attractive due to their stable long-term returns, relatively lower risks because of operational portfolio and better corporate governance.”

“Besides such vehicles have better credit profile due to benefits of cash-flow pooling, diversification of assets and regulatory cap on both leverage and proportion of under-construction projects,” he says.

Bank-centric

At present, infrastructure financing is extremely bank-centric. Banks and NBFCs together account for more than 95 percent of Infra debt. Around 22 percent of national infrastructure pipeline is expected to be undertaken by private sector and would require Rs. 15.7-lakh crore of debt over five years, at 70:30 debt-to-equity ratio.

The recent announcements in the Union Budget are expected to have varied impacts on InvITs. The removal of dividend distribution tax (DDT) has partially diluted the pass-through benefit available with InvITs and with dividend now being taxable in the hands of shareholder/unit holders will be negative as higher tax incidence in the hands of the unit holders will result in lower net-yield and reduced equity IRR (internal rate of return).

Jain says, “Domestic unit holders are likely to witness 34 percent drop in returns while foreign investors would witness around 22 percent decline in returns. Overall, the impact of higher tax incidence for unit holders may play spoilsport thereby making equity-raising a challenging task for InvITs.”

Complex nature, big hurdle

As far as the market performance is concerned, ICRA notes that the complex nature of InvIT limits participation from all investor classes; it requires sophisticated understanding of the underlying assets.―The Hindu Business Line