Context: NHAI's InvIT will be a Trust established by NHAI under the Indian Trust Act, 1882 and SEBI regulations. The InvIT Trust will be formed the objective of investment primarily in infrastructure projects.

About: Union Cabinet chaired had approved the National Highways Authority of India (NHAI) setting up Infrastructure Investment Trust(s) (InvIT) in December 2019, the company has recently started meeting investor groups, as it prepares to come up with its InvIT issue.

The issue will enable NHAI to monetize its completed National Highways that have a toll collection track record of at least one year. The NHAI reserves the right to levy toll on identified highways and it will help the company raise funds for more road development across the country.

What are InvITs?

• Infrastructure investment trusts are institutions similar to mutual funds, which pool investment from various categories of investors and invest them into completed and revenue-generating infrastructure projects, thereby creating returns for the investor.
• The capital market regulator notified the Sebi (Infrastructure Investment Trusts) Regulations, 2014 on September 26, 2014, and these trusts are likely to help facilitate investment in the infrastructure sector.
• Structured like mutual funds, they have a trustee, sponsor(s), investment manager and project manager.
• NHAI’s InvIT will be a Trust established by NHAI under the Indian Trust Act, 1882 and SEBI regulations. The InvIT Trust will be formed the objective of investment primarily in infrastructure projects.

How does it work?

• The Indian InvIT market is not yet mature and has supported formation of 10 InvITs till date — in roads, power transmission, gas transmission and telecom towers sectors — of which only two are listed, according to a report of the task force on National Infrastructure Pipeline.
• The InvITs listed on the stock exchange are IRB InvIT Fund and India Grid Trust.
• The listed are required to maintain a maximum-leverage ratio of 49 per cent, which can be increased to 70 per cent subject to certain conditions, such as six continuous distributions to unit-holders and AAA-rating.
• With the significant amount of funding required in the infrastructure sector and a gap in availability of long-term funds, this structure helps close that gap by enabling fund raising from capital markets.

Why does NHAI need fund and how will it benefit the economy?

• At a time when private sector investment in the economy has declined, fund-raising by NHAI and spending on infrastructure will not only provide a fillip to the economy, but will also crowd-in private sector investment.
• So NHAI’s InvIT offer, is a way for the government to tap alternative sources of financing to boost public spending in the roads and infrastructure sector.
• In October 2017, the Centre had launched Bharatmala Pariyojana, its flagship highway development programme, for development of 24,800 km of roads at a total investment of Rs 5,35,000 crore.
• In order to complete the projects, NHAI needs adequate funds and one of the options is to monetize the completed and operational NH assets and offer attractive schemes to private players to invest in construction of National Highways.

How does it benefit the investor?

• A retail or even a large financial investors may not be typically able to invest in infrastructure projects such as roads, power, energy etc. InvITs enable these investors to buy a small portion of the units being sold by the fund depending upon their risk appetite.
• Given that such trusts comprise largely of completed and operational projects with positive cash flow, the risks are somewhat contained.
• The investors can benefit from the cash flow that gets distributed as well as in capital appreciate of the units.
• Unit holders also benefit from favorable tax norms, including exemption on dividend income and no capital gains tax if units are held for more than three years.

Reference: https://indianexpress.com/article/explained/explained-how-nhai-plans-to-monetise-its-highways-through-invits-6605500/

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