Why are InvITs attracting so much investor interest? Could you tell us more about CIT InvIT and help us understand the roles and responsibilities of the sponsor, investment manager, project manager and trustee?

Introduction to InvITs in India

InvITs (Infrastructure Investment Trusts) are a form of AIF structure and are akin to mutual funds focused solely on the infrastructure sector and governed by the SEBI InvIT Regulations 2014 as amended from time to time. InvITs are inherently a yield instrument that attracts investor interest as it is supported by cash flow from operating assets. Currently, there are 25 registered INVITs in the country, which can be classified into two categories: private listed and public listed. Publicly listed InvIT offers more liquidity and tradability compared to private InvITs which are reserved for institutional investors and corporate entities only.

Characteristics of INVITs

InvITs are classified as hybrid securities and the units are in the form of quasi-equity with the characteristics of both a debt and equity investment. Although their returns may not match those of pure equity investments, they generally offer better returns compared to traditional debt options, such as debt mutual funds, FDs, etc. This makes INVITs an attractive choice for stock and bond investors seeking a balanced risk profile.

In today’s investment landscape, many investors are looking for options that offer liquidity and better returns than conventional products, which is something InvIT fits perfectly into.

Tax benefits and distribution

InvIT distributes cash to unitholders in the form of: repayments, interest, dividends and capital reduction. Depending on whether the asset/SPV has opted for the old tax regime or the new tax regime under section 115BA of the Income Tax Act, the dividends may be exempt from tax or taxable as the case may be. In our case, we have certain assets on which the old tax regime is applicable and therefore the dividend to this extent will be tax-free in the hands of the investors.

Key parts of the InvIT structure

The structure of INVITs involves several key players, including sponsors, investment managers, project managers and administrators. Our sponsor, Gawar Construction Limited, is a leading player in the industry, with a turnover of over ₹7,000 crore in FY24. Founded by Mr. Rakesh Kumar, a first generation entrepreneur who started his journey at the age of 18, the company, under his leadership and guidance, has evolved over 30 years from executing small projects to executing large-scale and complex projects. Gawar is primarily an EPC company focusing on roads and has recently diversified into metro projects. The sponsor has a good track record of completing projects ahead of schedule and, to date, has completed 5 of 7 HAM projects ahead of schedule and has been rewarded with early completion bonuses in accordance with the agreement concession. The sponsor was appointed project manager of InvIT. You can visit our www.capitalinfratrust.com for more details.

Investment Manager

The investment manager is 100% owned by the sponsor, which is typical of all INVITs, but it operates independently. The investment manager must meet certain criteria as per InvIT regulations in terms of employee experience, net worth criteria and the board of directors must have at least 50% independent directors. Additionally, if an investor owns more than 10% of InvIT’s shares, they have the option to appoint a designated director. This helps to put in place the appropriate governance necessary for the investment manager to operate InvIT independently. In our case, we have an independent board of directors composed of seasoned professionals, bringing valuable expertise related to the infrastructure sector. For more details, please visit www.capitalinfratrust.com

Axis Trustee has been appointed as trustee of InvIT and has significant experience in managing compliances and as a custodian to unitholders.

You collect Rs 1,200 crore through the fresh issue of units. How many additional assets will this money help you fit into the portfolio? Also, what is the ROFO agreement you have with the sponsor?

We are raising a fresh issue of 1,200 Cr to reduce bank debt to meet the leverage requirement as per regulations and repay sponsor’s unsecured debt. For more details, please read the Draft Offering Documents (DOD) under the Product Usage chapter. For further acquisitions, we will exploit the market again.

Right of first offer (ROFO)

Our Right of First Offer (ROFO) is set for a period of 5 years with a further renewal for another period of 5 years., ROFO specifically covers road assets only whether it is its TOT, BOT Toll or HAM. Our goal is to provide investors with accretive value through acquisitions.

Currently, the sponsor has 17 additional assets of NHAI HAM which are disclosed in the draft offering documents. In case the sponsor builds other road assets, whether BOT Toll or HAM, these will also be covered by the ROFO if this falls within the validity of the ROFO agreement.

This ROFO agreement ensures that the interests of the investors are protected and that the asset will be acquired by InvIT at the fair price, which has been established and negotiated between the sponsor and the investment manager with the approval of the unitholders.

Do you think InvITs are a better investment than debt instruments? If yes, why and what is the guarantee that you will respect the IRR committed? How often will InvIT declare dividends to unitholders?

Understanding INVITs and their value

In a public offering, there is no guaranteed engagement; there is a book creation process and the price is discovered through it. However, we can offer guidance on expected returns.

I believe that INVITs (Infrastructure Investment Trusts) have strong potential to outperform liquid and tradable debt instruments. By committing to a long-term investment in an INVIT, investors can expect balanced returns, leading to accretive value over time.

My personal view is that INVITs should be an asset class in every investor’s portfolio. This strategy can improve your investment profile by providing a natural hedge between equity and debt investments.

Overall, I have noticed a growing interest in Infrastructure Investment Trusts (INVITs) among investors. They offer an attractive alternative to traditional debt investments because they are backed by completed assets that generate stable cash flows. This stability can improve portfolio diversification and provide a reliable income stream, making INVITs an attractive investment.

It is also important to note that the law requires public INVITs to distribute returns at least twice a year. Although we have included a provision to potentially offer more frequent distributions, our current plan is to provide semi-annual returns for our public INVIT.

Could you introduce the professional management team that would take care of this InvIT?

Introduction to our professional management team

In terms of the management team, I have been in the InvIT space since 2018. ; I previously launched Oriental INVIT, a publicly listed InvIT in 2019, and also spent two years at Roadstar Infra Trust (ILFS InvIT) from 2021 to 2023. Our team consists of professionals with extensive experience in management of INVIT, ensuring that we operate effectively in the areas of lending and operational capabilities

Our CFO, Amit Kumar, has over 16 years of experience in the banking sector and has managed compliance relating to FEMA and RBI regulations as well as project financing for clients in the infrastructure sector, InvITs, PE funds, automotive accessories, among others. Extensive experience in lending for various INVITs greatly enhances the expertise of our team.

Additionally, we have a strong accounting team with previous experience in managing InvIT. The head of the accounting team has previously worked at other InvITs, ensuring that we have a thorough understanding of the complexities involved in running an INVIT. We are in the process of further strengthening our team.

Can the individual investor participate in this InvIT? What is the investment amount and why should one consider placing their funds in this instrument?

Yes Retail investors can participate in the public offering of InvITs. The minimum investment amount is approximately ₹15,000, which meets the public offering norms, making this opportunity accessible to the masses.

I think investors should consider incorporating InvIT into their portfolios. Many people tend to be conservative and go for debt instruments like MFs or FDs. By reallocating some of these funds to InvITs, investors can potentially achieve balanced returns.

The risk associated with our INVITs is significantly lower, as the cash flows come from hybrid annuity projects backed by the sovereign entity NHAI. This provides a reliable revenue stream, reducing overall investment risk compared to toll projects.

It is also important to highlight the differences between BOT (Build-Operate-Transfer) tolling projects and HAM (Hybrid Annuity Mode) projects. While BOT projects may carry traffic risks, HAM projects benefit from sovereign support, ensuring a more stable cash flow without any toll risk.

Do you have a preference for annuity projects, do you foresee the addition of toll projects in the future? Will all ongoing projects / completed projects be transferred to InvIT?

Currently, the sponsor only owns the assets of NHAI HAM. If the sponsor chooses to diversify into build-operate-transfer (BOT) toll projects in the future, these will also be part of the ROFO agreement until the agreement is valid. Additionally, our INVIT is open to acquiring third-party assets, including HAM, TOT and BOT tolls. Our decision to pursue these acquisitions will depend on the accretive value they provide to investors who align with the investment strategy.

Currently, the assets transferred to InvIT are projects carried out COD/Provisional COD, in accordance with the regulations.