InvITs and REITS, time to turn a new leaf

The Securities and Exchange Board of India (SEBI) made some significant decisions at its recent board meeting, including reducing the minimum subscription trading lot for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) as well as the minimum application value. These measures will boost liquidity for the public listed instruments and also enable more retail investors’ to participate leading to efficient price discovery.

During the meeting, Sebi also enhanced the minimum number of external investors required for unlisted InvITs back to five for 25 percent of the total unit holding. This move is expected to slow down the adoption of unlisted InvITs on account of complexities associated with the process of on -boarding five investors.

Since the instrument now has an established governance framework, minimum investor requirements could be removed for private InvITs.

Long road ahead
InvITs and REITs are now finding increasing acceptance among global and domestic investor community and could be India’s answer to attracting more private capital for infrastructure development and setting the bar higher for corporate governance.

However, due to several changes in the tax and regulatory framework in the last few years, the adoption of the instrument is behind the global level.
To set the context, compared to more than 800 listed REITs globally with a combined market capitalisation of $2.4 trillion, the product is still in its early days in India.

The market capitalisation of the only three listed REITs in India is $4 billion and the total capitalisation of all listed and private InvITs in the country is approximately $10 billion. Thus, there is a clear need to create a stable regulatory environment to foster quicker adoption of InvITs and REITs in India.

At the outset, these instruments had a rough start when they got marketed as products suitable for pensioners. But after the initial hurdles, InvITs and REITs gained momentum once they got accepted by global pension funds, sovereign wealth funds and large real estate and infra funds.

They have also found takers among retail investors as they provide stable, periodic cash flows, while offering other benefits like effective cashflow upstreaming mechanism, beneficial tax framework, a cross-collateralisation structure for effective leveraging and an improved corporate governance framework.

Missing in action
Further, improved liquidity of units also addresses exit concerns of investors. One peculiarity stands out though. While global pension funds and insurance companies are investing in Indian InvITs, their domestic counterparts are largely missing in action.

A limiting factor has been that the structure has been adopted only for classic commercial real estate and select infrastructure sectors like highways, power transmission, gas pipelines, telecom towers and fibre. Other suitable sectors for REITs like warehouses and data centres and for InvITs such as telecom towers and renewables are conspicuous by their absence.

With the encouragement of the Centre, several PSUs have also embarked on the InvIT journey with PGlnvlT being the first successful case (assets valued at $1 billion) and the NHAI InvIT may follow soon.

The space has seen interesting evolution from being a preferred monetisation route for Indian sponsors to now becoming a viable acquisition platform for several global investors looking at brown-field asset aggregation strategy in the country.

Further, the structure has created an avenue for directly getting limited partners (LPs) into the InvIT and REIT platforms (in a far more tax efficient manner), who until now would have been dependent on asset managers first closing a fund and then deploying capital.

With certain changes in the framework like (a) privately placed REITs being allowed, (b) allowing an asset manager to create single investor non-listed InvITs with a moratorium period for getting additional investors, and (c) allowing for differential units (like different classes of equity shares), the appetite for the product may grow.

The instrument’s journey has been affected by several changes in regulations and taxation rules. For instance, changes in tax laws have created uncertainty for investors.

For example, since the latest tax laws do not provide dividend distribution tax benefits for SPVs in existing InvITs that move to concessionary tax regime, investors are concerned about any future changes in tax benefits. This concern can be allayed by clearly establishing that the tax regime for InvITs will not be changed in the future.

Considering the estimated capital requirement of $1.4 trillion till FY25 as per National Infrastructure Pipeline, InvITs will be an important tool to attract an unexplored pool of capital and ensuring larger private sector participation. However, the instrument needs to be further developed by allowing InvITs and REITs access to all lenders who can directly lend to projects.

Regulations could provide all rights to InvIT project financiers under concession agreements/offtake contracts, allowing for a speedy approval process from concessionaires, lenders and regulators. Moneycontrol