Indian infra trust IPOs are a work in progress
India is finally set to welcome its first publicly listed infrastructure investment trusts (InvITs), with GMR Infrastructure and IRB Infrastructure Developers having officially asked the Securities and Exchange Board of India for approval to create and list their respective vehicles. But while the first deals are certainly welcome, much more needs to be done for the asset class to have a strong foundation.
There has been a lot of noise in India over the past couple of years about infrastructure investment trusts as the government tries to kick-start the asset class. Sebi first finalised the regulations in September 2014 before launching a consultation in August 2015 and following it up with a second one in December.
Having been at least two years in the making, the first signs of activity are now finally emerging, thanks to GMR and IRB. Both are on the verge of premarketing their InvITs and are the first among a handful of Indian infrastructure companies that are making preparations to launch their own trust IPOs.
But it would be wrong to assume that the appearance of these first deals means the asset class is set for success.
For starters, InvITs are going to be up against some tough competition if they want to attract domestic investors.
In India, investors can lock in an average yield of 8.5% from high quality Indian corporate bonds and can even find yields as high as 9.5% from domestic triple-A rated corporate debt. So to snatch buyers away from such lucrative opportunities InvITs are going to have to offer at least 100bp of return above the average corporate bond yields, say sources. But whether firms will be willing to pay up such a hefty amount is still a big question.
The government has also been pushing the development of infrastructure investment trusts in the hopes they will attract more long-term finance from international investors. Its thinking is in the right direction. After all, the need for capital to fund infrastructure projects is high in India — requiring more than $1tr a year — and by pushing firms to set up InvITs, the government is hoping to wean such companies off the country’s banking system.
But here too there are hurdles. Many foreign investors are still quite wary of putting their money into India given the sea of red tape they have to wade through. This is particularly the case with InvITs, where rules around withholding tax and dividend distribution tax (DDT) still confuse rather than provide clarity to both investors and issuers.
The DDT and the minimum alternate tax (MAT) weigh heavily on InvITs. Under the current framework, InvITs can only hold infrastructure assets directly or through a special purpose vehicle (SPV). But any dividends distributed by an SPV to a trust are subject to a 15% tax. Meanwhile, sponsors of an InvIT will suffer as much as a 20% MAT on income generated when they swap shares for units in a trust.
So while juicy opportunities are available in India, international investors are unlikely to be queuing up to snap up a piece of these InvITs unless Sebi clears up concerns around taxation.
Every asset class needs pioneers and it may be that the real extent of any issues with InvITs will only be understood once the first deals from GMR and IRB have launched. Then the real test will be how government and regulators act. If they are serious about making a success of the asset class they will be quick to learn the lessons of these early deals.