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What Are InvIT's: Infrastructure Funding In India

Founder, 335bazaar.com
Dec 14, 2017 11:00 AM 3 min read
Editorial

The capacity to aggregate high quality assets and raise capital is useful not just for large conglomerates but also middle-tier businesses. It is also an absolute must for aggregating mid-sized projects in India (INR20 - 200 crore) to bridge the infrastructure funding gap that is estimated to be in the range of $750 billion - $1.5 trillion.

 

A lot of emphasis is laid on the required funding. While important, greater focus is needed on which financial structures and vehicles are available in India to assist foreign and domestic investors access infrastructure opportunities. 

 

The Infrastructure Investment Trust (InvIT) regulation has been a step in the right direction. The InvIT structure has strict requirements such as minimum assets of INR500 crore that need to be held, minimum offer size of INR250 crore, and a minimum number of anchor investors required to back a trust structure.

 

While investor protection should be foremost, it is important for policy makers to enable flexible investment vehicles that provide institutional investors like large pension funds, insurance companies and investment funds access to the middle-tier of the market. Using a smaller and more flexible version of the InvIT with lower minimum asset requirements and flexibility around number of anchor investors, will allow high quality assets which are medium sized to get aggregated.

 

Not all high-quality assets are necessarily large-sized projects.

 

For example, high quality solar projects in the 5-20 MW range can be distributed across a large geographical area.

 

A financial structure that allows an operator to aggregate such solar projects will create opportunities for investors to access medium sized but economically attractive projects. In addition, financial structures that aggregate medium sized projects create liquidity since investors can trade the units of the financial structures. Such liquidity helps bring down the cost of acquisition and exit, helping bring down transaction costs and enhance investor confidence.

 

Most importantly, such flexible investment vehicles allow middle-tier businesses to reduce their cost of financing. The fact that high quality assets can be segregated in a separate financial structure, allows for such assets to be funded at more attractive rates than when such assets sit on debt ridden balance sheets. The flexible structure allows the debt-ridden companies to monetize the value of the assets and clean up their balance sheets.

 

Rules that stipulate 90% of net distributable cashflows must be paid to the investors, can at times deny access to good market opportunities. Having some degree of flexibility around the distribution of cashflows can assist investors to aggregate and access market opportunities better.

 

For instance, if there is an attractive project that can be bought out and improved upon, then the cashflows should be allocated towards buying the project.

 

Beyond this it is imperative that policy makers allow financial structures to stay unlisted if the investors are only institutional investors. The listing requirements for InvIT that minimum asset size be of INR500 crore rules out many high-quality medium sized assets from accessing much needed capital.

 

In summary, an investment vehicle for institutional investors that allows for aggregation of infrastructure assets with a lower limit for minimum asset size, fewer anchor investor requirement, less stringent requirement around cashflow distribution and a non-compulsory listing requirement is needed. Such an investment vehicle will greatly assist institutional investors access middle-tier infrastructure opportunities in India.

In finance parlance, the “non cusip instruments” need liquidity and flexibility to unlock real value.

 

Originally Published in Financial Express