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Few takers make infrastructure trusts a less than inviting option

For infrastructure projects which are under construction, raising funds through infrastructure trusts (InvIT) via private placement is a viable option; however, it is not taking off in a big way as most investors remain wary of incomplete projects. There are projects worth Rs 4-5 lakh crore in the infrastructure space but barring one — MEP Infrastructure Developers — none are exploring this option to raise funds thus far.

Jayant Mhaiskar, vice chairman and managing director, MEP Infrastructure Developers, said, “This route will allow us to bring in equity for the purpose of future bidding. We are looking to see if we can club our hybrid annuity projects as a part of it as well, which will make the offer size bigger,” he said. The company is targeting to make the offer in financial year 2017-2018.

Industry experts say that this could be a good way for the developers to raise funds to be able to bid for future projects. High leverage levels have restrained the infrastructure developers from taking on new projects in the last few years, as the focus is on debt repayments.

In roads sector alone there are 166 projects under BOT toll, annuity and hybrid annuity model that are under construction having a project cost of over R1.65 lakh crore, according to data sourced from ratings agency ICRA. In power sector, according to Central Electricity Authority (CEA) around 50,000 megawatt of thermal power capacity will come up by 2022 having a cost of between R2.5-R3.5 lakh crore. This is at the rate of R5-7 crore per megawatt depending on the landed cost.

InvIT through private placement makes for a lucrative option for raising funds by the concessionaires scouting for equity for new projects, which is hard to come by as banks and investors remain wary of lending to greenfield infrastructure projects. Unlike a public InvIT, where only operational and revenue generating assets can be put in the trust structure, under construction assets can be put in InvIT through private placement.

 

A public InvIT is where the units will be offered through initial public offering and will have retail participation as well, while a private placement will have financial institutions and body corporate subscribing to the issue and not retail investors.

Though a private placement InvIT would be somewhat similar to raising funds from a private equity fund, there are significant tax benefits for unit holders in a private placement InvIT.

Bhairav Dalal, partner, PwC India explained to FE that the dividend distribution tax (DDT) is nil in InvIT on the dividend distributed by the trust to the unit holders, while it is as high as 20% for investors in a PE fund. In case where there is an interest component of income to be distributed by trust to the unit holders, it would attract withholding tax at the rate of just 5%, while this could be anywhere in the range of 10%-20% in a PE fund depending on the country the investors are based.

However, Dalal said that the risks involved with infrastructure assets in India outweigh the tax benefits. “The investors are not ready to take the equity risk involved in a green field project. Risks associated with land acquisition, right of way etc is not something that investors want to get involved with”.

Samir Kanabar, partner (tax and regulatory services), EY points out that the investors of this instrument will largely be global pension funds, university funds, superannuation funds who want a consistent flow of income. “Funds are keen to invest as they like infrastructure as an asset class and government has eased out regulations and tax related to InvIT. It is now for industry players to operationalise InvIT by providing clarity of continuous and stable return to investors,” he said.

Given the high demand for funds for bidding of new infrastructure projects, SEBI had relaxed the InvIT norms in November to allow the concessionaires to raise funds even through under construction projects.

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