What are InvITs and how do they function?

An Infrastructure Investment Trust or InvIT follows the similar concept of mutual funds, wherein, investors’ funds are pooled together and managed by a professional.  

Here, in place of instruments such as bonds, and shares, investments are done in infrastructure assets such as roads, power plants, transmission lines, pipelines, telecom towers, fibre optic networks, etc. The revenue generated from these assets is distributed to investors in return. 

Structure of InvITs 

An infrastructure developer company forms a trust, and therefore, becomes its sponsor. A trustee is then appointed who takes control of the infrastructure assets of the InvIT. After this, the sponsor no longer owns or controls these assets.  

• The trust may own or control the assets either directly, or indirectly through an SPV (Special Purpose Vehicle).  

• An SPV is a domestic company in which the trust owns a stake of 50 per cent and above. It holds the infrastructure assets on behalf of the trust.  

• Next, the trustee appoints an investment manager and a project manager for the trust. The former is appointed to ensure that optimal returns are generated by existing investments. Whereas the latter is appointed to make investment decisions on behalf of the trust.  

• After the pre-requisites are fulfilled, the InvIT can now be registered. Following this, the InvIT can raise funds by selling units to the investors either by way of a public issue or a private placement. 

Regulatory requirements for an InvIT 

As per regulatory requirements, at least 80 per cent of the investments should be made in revenue-generating assets, that is, infrastructure projects which are completed and have started generating cash flows. And at most 20 per cent of the investments can be made in projects that are under construction and in instruments such as shares and debenture.  

Moreover, the InvITs are mandated to distribute 90 per cent of their net profit to the investors of the trust. This ensures steady returns for the investors. 

How do InvITs help the parties involved? 

The sponsors of InvITs can raise capital by monetizing the operational infrastructure assets. This capital can further be used to fund the construction of other infrastructure assets. On the other hand, the investors of the trust gain exposure to infrastructure investments, which are generally risky, and gain steady returns from the investments. Thus, InvITs are beneficial to both parties involved.