Budget 2024-25 Expectations – Making InvITs an investment vehicle of choice

InvITs have played a critical role in attracting private capital to the infrastructure sector

As the country sets course to become a $5 trillion economy in the next four years and an advanced economy by 2047, the impending Union Budget announcements have raised expectations. Infrastructural development plays a key role in the economic development of a nation, and consequently, the infra sector in India has seen a lot of budgetary and policy support from the Union government over the last few years.

The National Investment Pipeline (NIP), launched in 2020, has been one of the most ambitious projects of the Indian government, which envisaged an investment of more than Rs 1.5 lakh crore for 9,500+ projects across the roads, generation, transmission & distribution, ports, waterways, and other sectors. Additionally, the framework laid out in the National Monetisation Pipeline (NMP) has also boosted the monetisation of various brownfield assets to support the investment requirement of the NIP. However, expedited infrastructure development and the need for private capital for it continue to be a major hurdle for India’s economic growth and need further improvements.

Since the introduction of Infrastructure Investment Trusts (InvITs) in the Indian market in 2014, they have played a critical role in attracting private capital to the infrastructure sector through foreign as well as domestic investors. InvITs have emerged as a platform for enabling democratic ownership of infrastructure assets. With enhanced governance and ease of doing business through the wonderful work done by the Ministry of Finance and the Securities and Exchange Board of India (SEBI), InvITs have seen enthused involvement from institutional and retail investors for participation in sectors like roads, pipelines, and transmission.

InvITs rely on the central theme of brownfield asset monetisation which provides them with an avenue for growth while freeing up government/developer capital for further investments. Frameworks like NMP and Acquire, Operate, Maintain, and Transfer (AOMT) are critical cogs for driving the growth of InvITs. However, what becomes paramount is the monetisation of assets through competitive bidding, which ensures true price discovery and provides transparency to investors.

Budgetary support needs of InvITs

India has 23 InvITs registered with SEBI, 20 of which are listed either publicly or privately. Together, they have over Rs 2 lakh crore of assets under their management. This asset class is yet to unlock its true potential, which can create a capital investment of about Rs 8 lakh crore over the next four to six years.

However, to increase the attractiveness of InvITs as an investment diversification opportunity for retail and institutional investors, we need policy upgrades, among other things, to:

1. Classify InvITs and REITs as equity or equity-like instruments, which will act as a significant catalyst for attracting a larger pool of investments into these instruments,
2. Allow InvITs to participate in mainstream indices to boost liquidity and market depth, widen the investor base through ETFs, and help in better price discovery,
3. Equalise the holding period requirement for listed units of InvITs in line with equity shares at 12 months instead of 36 months for computing LTCG,
4. Enable external commercial borrowings (ECBs) for InvITs to help them diversify their lender base as well as increase debt tenure and market depth,
5. Enable EPFO and provident funds to invest in InvITs through units and debt securities, as well as increase investment limits for insurance companies and pension funds from the current 3 percent to 10 percent.

Harsh Shah is the CEO of IndiGrid. Views are personal, and do not represent the stand of this publication.