Experts warn of higher risks for retail investors as NHAI plans public InvIT

Current SEBI norms only allow retail investors to invest in InvIT where at least 80 percent of their total assets are completed and profit-generating infrastructure projects.

The central government's plan to include "under-construction" projects in National Highways Authority of India's first InvIT open to retail investors may increase the risk for potential investors but can be rewarding as well, experts said.

The NHAI, Ministry of Road Transport and Highways of India (MoRTH), and the National Highways Infra Trust (NHIT) are in discussions with the Securities and Exchange Board of India (SEBI) for launching the first NHAI public InvIT by February 2024.

An InvIT, or infrastructure investment trust, is a pooled investment vehicle like a mutual fund. While mutual funds invest the sum received in financial securities, an InvIT invests the same in infrastructure assets.

Investors in an InvIT become part owners of its operating assets such as toll roads or power transmission lines, while in a stock MF, they get to part-own the underlying business.

While the government is keen to allow retail participation in InvITs that hold a majority of under-construction assets, current SEBI norms only allow retail investors to invest in InvIT where at least 80 percent of their total assets are completed and profit-generating infrastructure projects. Privately floated InvITs are exempt from this requirement.

The NHAI has so far come out with two tranches of its InvIT open to only institutional investors.

The government has asked SEBI to consider easing norms to the extent where around 50-60 percent of the assets held in an InvIT are made up of under-construction assets.

"If the NHAI wants to include under-construction projects as part of its public InvIT it will present a more rewarding return proposal to retail investors but the problem is that it will open the floodgates of other private sector companies to issue InvIT with under-construction assets," Shriram Subramanian, Founder and Managing Director, InGovern told Moneycontrol.

He added that if public InvITs with a large share of under-construction projects are permitted then private companies or sponsors facing a shortage of funds for some of their projects may use this mechanism to raise funds, which comes with public shareholders being exposed to the risk of incompletion.

Similarly, J N Gupta, managing director of Stakeholders Empowerment Services, said that a public InvIT including under-construction projects comes with two included risks to potential retail investors.

"The first is that the risk of project completion will be a part of these InvITs and the second is that returns from these InvITs will start only once the projects are completed," Gupta said.

He added that the valuation of such InvITs will have to be assessed periodically based on the progress of the projects.

In the case of such InvITs being issued by government-backed agencies the risk to retail investors will be lower than if they are issued by private companies, he said.

Experts also said that the appetite for InvITs having a larger share of under-construction projects has risen in the country in the last few years.

Afaq Hussain, Co-Founder & Director of the Bureau of Research on Industry and Economic Fundamentals (BRIEF), told Moneycontrol that the SEBI norms regulating only a 20 percent stake of under-construction projects in InvITs were essential when these financial instruments were introduced. Since then, the market has evolved and retail investors are more aware and willing to put their money behind infrastructure projects, he said.

"The government has pushed infrastructure development in its last two budgets, which has created an appetite for infrastructure funding in the country," Hussain said, adding that retail investors are now bullish on government-backed infrastructure projects.

Similarly, Gupta said a large pool of investors would be willing to invest in such InvITs but the valuation of these new InvIT will be at much higher discounts compared to the public InvITs listed at the moment.

The NHIT is currently looking at raising around Rs 7,500 crore to Rs 8,000 crore by monetising six road assets in the third round of highway monetisation in September.

Earlier this week, news reports said that SEBI is mulling bringing in norms for follow-on offers by real estate investment trusts (REITs) and InvITs, which is expected to expand the market.

The two instruments were launched in India with an aim to provide exposure to investors to real estate and infrastructure projects and help them diversify risks through pooling arrangements.