Infrastructure is one of the most critical sectors of any economy and the cornerstone of its economic development. A well-developed infrastructure set-up enables the overall development of a country and facilitates a steady inflow of investments, thereby augmenting the capital base available for the growth in a sustained manner.
Given such importance of infrastructure sector, Securities and Exchange Board of India (SEBI) had introduced the concept of Infrastructure Investment Trust (InvITs) in 2014, with a view to promote infrastructure development in India. InvITs are trust vehicles, which are listed on stock exchanges, raise funds from investors (retail as well as institutional), acquire income yielding infrastructure assets, manage such assets, and distribute regular yields to the investors under a SEBI regulated regime.
InvITs which are listed on Indian stock exchange(s) can either be privately placed or public. As the name suggests, privately placed InvITs can raise funds from institutional investors, public InvITs can raise funds from retail as well as institutional investors and have more diversified and low risk investment conditions. The concept of a privately placed and unlisted InvIT has also been recently introduced by SEBI.
InvITs have off late been garnering a lot of attention, not just from the investor and sponsor community, but even from Govt. of India, which has been keenly exploring InvITs as a possible means to monetize its infrastructure assets held by CPSEs.
Given the ambitious target of achieving 175GW of renewable energy by 2022, which Govt. of India has set itself, InvITs are sure to play a significant role in the solar sector, which still needs a lot of capital and funding, by augmenting long-term capital from foreign as well as domestic investors.
The development of solar sector has recently been hit by multiple issues such as power tariff disputes, GST concerns, imposition of safeguard duty on panels imported from China and Malaysia, issues in raising capital, which has led to a decline in investor interest in solar auctions and delay in completion of existing projects. In such a scenario, InvITs could act as a game changer for the solar sector, on account of various factors, such as strong corporate governance framework of SEBI, stable long-term returns because of mandatory distribution rules of 90% of cash flows, capped leverage ratio, lower risks, high quality assets, sponsor lock-in of 15% units for 3 years and tax benefits on income distributions (such as exemption from DDT under specified conditions, taxation of interest for nonresidents @ 5% etc.). As per press reports, Tata power and Piramal Enterprises are already in the planning stage for setting up renewable focused InvITs.
InvITs act as an efficient and optimum structure for financing/ refinancing of solar projects and to free up sponsor capital for reinvestment into other avenues, thereby acting as a catalyst in the development of this sector. More specifically in solar sector, InvITs could play a critical role by easing the burden of the banking sector, by replacing/refinancing existing high cost bank debt with long-term low-cost capital from investors, which would help banks to reduce their exposure to solar sector. InvITs are thus expected to get a lot of traction in coming times.