Infrastructure Investment Trusts: How do they provide a new path for infrastructure financing?

Infrastructure investments have long been a key component of economic growth and development. In India, these investments have traditionally been funded by the government or large corporations, leaving little room for direct investment from the public. However, the introduction of infrastructure investment trusts (InvITs), has opened up a new avenue of investment for the citizens of India.

It is a relatively new investment vehicle that has gained traction in recent years due to its ability to provide investors with access to high-yielding infrastructure projects. InvITs are typically structured as trusts, funds, or companies and offer investors the opportunity to invest in a portfolio of infrastructure assets. The structure of an InvIT allows investors to realize returns from the underlying infrastructure investments, while also providing protection to the underlying investments.

What is the structure of an infrastructure investment trust?

InvITs are investment vehicles that are structured like mutual funds and are registered with Sebi as trusts.

Initially, an infrastructure development company takes over the responsibilities of the sponsor and appoints a trustee to create an InvIT. The trustee assumes management of the assets that will be a component of the infrastructure investment trust once appointed.

After the trustee takes over, the sponsor is no longer able to manage or control the InvIT's assets. The trust now owns these assets, and it has direct authority over them. Alternately, the InvIT can opt to use a Special Purpose Vehicle to have indirect ownership over the infrastructure assets.

In this instance, the SPV is responsible for directly managing the infrastructure asset on behalf of the trust, although the InvIT is required to own a minimum of a 50% share in such an SPV.

The appointment of the management by the trustee is the next stage in the establishment of an InvIT. Two managers are chosen to lead an InvIT: an investment manager and a project manager.

The primary duty of InvIT's investment manager is to make sure that the trust's current investments provide the best returns possible. The investment manager is also charged with choosing investments that will help the trust's assets improve.

On the other side, the InvIT project manager is in charge of overseeing the trust's infrastructure assets and making sure that ongoing infrastructure projects are finished on schedule.

The bottom line

The Indian government has taken some key steps in the last few years to promote the development of InvITs in India. In 2018, it set up a specialized financial institution called the India Infrastructure Investment Trust (IIT) to support the development of InvITs. This was followed by the introduction of the InvIT Regulations in 2019. These regulations created the framework for setting up and operating InvITs in India.

InvITs offer investors the opportunity to gain exposure to a portfolio of infrastructure assets without having to directly invest in each individual asset. Furthermore, they provide certain tax advantages and can be beneficial to the infrastructure sector.

However, there are still some challenges that need to be addressed before InvITs can become widely accepted in India. If these issues can be addressed, then InvITs could become a popular investment vehicle in India.