Tag: InvIT

How InvIT, REIT income is taxed

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Over the last few years, infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) have emerged as a popular investment option for those who want a regular income flow and are comfortable with taking on some risk.

The soaring equity market valuations and dwindling fixed income returns have only added to their appeal. With the government laying out a roadmap for monetisation of infrastructure assets, InvITs are expected to gain further ground.

An InvIT/ REIT pools money from investors (unitholders) to invest in a portfolio of income-generating infrastructure assets (80 per cent in operational assets) via subsidiaries (SPVs). REITs invest in real estate projects and InvITs in infrastructure assets, such as power transmission or road projects. The unitholders receive a regular payout, at least once every six months. Also, as units of publicly issued InvITs/REITs trade like shares on the exchanges, they offer an opportunity for capital appreciation.

Investors, however, need to wade through their complex taxation. The income of an InvIT/ REIT is passed on to unitholders in the form in which it’s received and is taxed as such.

Distributable surplus

An InvIT/ REIT receives cash flows from its project SPVs in the form of: a) dividends in return for the stake held b) interest and c) principal repayment on loans extended to them. Any other income at the InvIT/ REIT level such as capital gains from assets sold and not re-invested, and return on surplus cash invested, too, gets added to this.

Apart from this, if a REIT holds any real estate asset directly and not via an SPV, then the income flows to it in the form of rent (and not interest and dividend) and gets added as such.

All expenses incurred at the InvIT/ REIT level are deducted from the total cash inflow to arrive at the net distributable surplus (NDS). Unitholders must be paid at least 90 per cent of the NDS. A break-up of the components of the distribution is usually available on the websites/ presentations of the respective InvIT/ REIT.

Tax treatment

Distribution: The interest component of the NDS is taxed at your income tax slab rate. The dividend, too, is taxed at your slab rate if the project SPVs of the InvIT/ REIT have opted for the new concessional tax regime under section 115BAA of the IT Act. The dividend is tax-exempt if the project SPVs have not opted for the concessional tax.

Also as Hemal Mehta, Partner, Deloitte India, explains, before the interest and dividend are paid out, a 10 per cent withholding tax (for resident investors) is deducted by the InvIT/ REIT, against which the investor can claim credit.

The loan repayment component represents return of capital and is not subject to tax. Any other income at the InvIT/ REIT level such as capital gains on any asset sold or interest on fixed deposits which is passed on to the unitholders, too, is tax-exempt in their hands.

Powergrid InvIT, India Grid Trust and IRB InvIT Fund are the three publicly listed InvITs open to retail investors.

IRB InvIT Fund has distributed ₹41.30 per unit (₹30 as interest and ₹11.30 as return of capital) since its listing in May 2017 until March 31, 2021. Since most of the trust’s SPVs are loss-making (PAT level), there have been no dividends.

In case of India Grid Trust, almost all the distributions since its listing in June 2017 have been in the form of interest income. As of June 2021, India Grid Trust had opted for concessional tax for all except one of its SPVs. Any future distributions in the form of dividends will, therefore, be taxed accordingly.

Powergrid InvIT, which listed recently has not yet made any distributions. Four of the InvIT’s five project SPVs have opted for concessional tax.

In the REIT space, you have Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust, all publicly listed.

In the June 2021 quarter, they distributed ₹5.64, ₹4.60 and ₹6 per unit, respectively of which 80 per cent, 92 per cent and 24 per cent was tax-free in the hands of the investors.

Capital gains: If a unitholder sells his/her InvIT/ REIT units after holding them for up to 36 months, the short-term capital gains are taxed at 15 per cent (plus applicable surcharge and cess) without indexation benefit.

If the units are sold after being held for over 36 months, long-term capital gains (exceeding ₹1 lakh a year including from all equity investments) are taxed at 10 per cent (plus applicable surcharge and cess) without indexation benefit.

These rates are applicable to all REITs (which have to be mandatorily listed) and the listed InvITs.

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Sebi revises minimum application value, trading lot for REITs, InvITs, BFSI News, ET BFSI

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New Delhi: Markets regulator Sebi has reduced the minimum application value of REITs and InvITs, and revised trading lot to one unit for these emerging investment instruments to make them attractive for retail investors. The minimum application value has been cut down to the range of Rs 10,000-15,000 for both REITs and InvITs, compared to the earlier requirement of Rs 50,000 for REITs and Rs 1 lakh for InvITs, Sebi said in two separate notifications dated July 30.

Also, the regulator said the revised trading lot will be of one unit for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).

Allotment to any investor is required to be made in the multiples of a lot.

Earlier, for initial listing, a trading lot was required to be of 100 units.

The Sebi’s move will lead to better liquidity and efficient price discovery and will provide an attractive opportunity for retail investors to earn stable yields with growth potential.

In addition, the regulator has introduced a minimum unit holders requirement for unlisted InvITs.

“The minimum number of unitholders in an InvIT, other than the sponsor(s), its related parties and its associates, shall be five, together and collectively holding at least 25 per cent of the total units of the InvIT, at all times,” Sebi said.

Explaining further, the regulator said a unit holder along with its associates and related parties will be considered as a single unit holder.

REITs and InvITs are relatively new investment instruments in the Indian context but are extremely popular in global markets.

While a REIT comprises a portfolio of commercial real assets, a major portion of which is already leased out, InvITs comprise a portfolio of infrastructure assets such as highways and power transmission assets.

As of March end, a total of 15 InvITs and four REITs were registered. Of these, six InvITs and three REITs were listed on the stock exchanges.

These investment vehicles collectively raised close to Rs 55,000 crore in 2020-21, taking their net assets to Rs 1.64 lakh crore.

The funds were raised through the initial offer, preferential issue, institutional placement and rights issues.

In a separate notification, Sebi has permitted banks, other than scheduled banks, to act as a banker to such issues, to provide easy access to investors to participate in public/rights issues by using various payment avenues.

Bankers to an issue means a scheduled bank or such other banking company as may be specified by Sebi from time to time, carrying activities including acceptance of application money, acceptance of allotment or call money, refund of application money and payment of dividend or interest warrants, the regulator said.

The new rules have become effective from July 30, it added.

The notifications come after the board of Sebi approved proposals in this regard in late June.



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Four things you probably didn’t know about InvITs

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With IndiGrid Investment Trust’s (InvIT) bond offer and PowerGrid InvIT’s IPO both hitting the markets last week, there was much curiosity about this relatively new asset class. But there was a lot of misinformation too. While some folks urged investors to look out for a grey market premium in the PowerGrid InvIT, others compared the high ‘yield’ on InvITs to bank deposit returns. Here are four features of InvITs that you probably weren’t told about.

No assured yield

The attractiveness of an InvIT is usually showcased in terms of its ‘high yield’ compared to bank FDs or bonds. An InvIT’s yield is calculated as its distribution per unit divided by its market price. But unlike a bond, an InvIT’s ‘yield’ is neither fixed nor guaranteed.

When you invest in a bond, the issuer company promises to pay you a fixed interest at regular intervals and repay your principal on maturity, irrespective of how its business fares. If its sales or profits take a hit, it will ordinarily not stop paying interest or the maturity amount, as it will then be branded a defaulter. In the case of an InvIT though, the issuer makes no promise to pay out a fixed distribution. The periodic distributions depend entirely on how the business performance.

An InvIT owns a portfolio of completed and cash-generating infrastructure assets, usually through special purpose vehicles (SPVs). It acquires these assets using own equity or debt. It passes on 90 per cent of cash flows from these assets to investors by way of distributions. Now, infrastructure projects are usually long-gestation and high-risk and therefore need to generate high returns to compensate. This is what makes for a high cash flow ‘yield’ from most InvITs. But the risk attached to infrastructure projects also affects the predictability of those cash flows. An InvIT’s distribution depends on many moving parts – returns from projects (tolls in road projects, fixed fee in power transmission etc), dividends or interest from SPVs and interest or debt repayments on the loans taken.

IndiGrid InvIT has distributed ₹12 per unit in the last couple of years on an original issue price of ₹100 per unit. This comes mainly from charges earned on the power transmission lines owned by it. Should the lines go down due to a technical glitch or tariffs get cut by regulators, revenues can fall and so will its distributions. IRB InvIT, which owns a portfolio of toll roads, has seen fairly big swings in its annual distributions owing to traffic fluctuations and events such as farmer protests and Covid. From ₹12.25 per unit in FY19, it fell to ₹10 in FY20 and further to ₹6 in the first nine months of FY21. Apart from their income, InvITs also sometimes distribute capital to investors which can be quite lumpy.

Risk of capital losses

In bonds or NCDs, if you pick high quality issuers, you’re usually sure that you’ll get back principal at maturity. With InvITs, your capital value depends on the traded price of units. When you need the money, you need to exit at traded prices that will decide your capital gains or losses. InvITs are required to get their portfolio of infrastructure assets valued periodically by independent valuers and publish this as their NAV or enterprise value. This is the ‘fair value’ of the InvIT. But the market price, just like for shares, can trade at a premium or discount both the fair value and the issue price.

The NAV of an InvIT should ideally move up over time as it expands its portfolio by adding high-return assets and shedding low-return ones. But regulatory and macro risks can affect the valuation of this portfolio. IRB InvIT, which owns toll roads, has seen its NAV dip from over ₹124 in September 2017 to ₹101 by September 2020. But the market price has consistently remained at a discount to NAV, with many risks cropping up around toll revenues. The InvIT’s price fell to ₹27 in April 2020 and is at Rs 54 now against an issue price of ₹102. IndiGrid InvIT is at ₹126 now but was at ₹80-90 levels for a long spell in 2019-20, below the issue price of ₹100.

Multiple layers of fees

Unlike MFs where all the costs charged to you are packaged into a single total expense ratio (which is capped by SEBI), InvITs charge multiple layers of fees on which there is no regulatory cap. InvITs usually pay a flat fee to their trustee for overseeing whether the investment manager and sponsor are performing their functions correctly.

Then, there’s the investment manager in-charge of managing the portfolio, ensuring that the assets generate adequate returns and managing the level of borrowings. The manager earns an annual fee as a percentage of the InvIT’s gross or net revenues. IndiGrid InvIT for e.g. pays 1.75 per cent of revenues from operations minus operating expenses, as the manager fee. InvITs also pay project managers a percentage of their operating expenses to ensure their assets are maintained in running condition. IndiGrid’s project manager earns a 10 per cent fee on gross expenses incurred on operating and maintenance costs.

Complex taxation

Finally, compared to NCDs, shares or MFs, the taxation of your returns from an InvIT is a complicated affair. While the InvIT itself is treated as a pass-through entity in some respects, the cash flows it passes on to you is taxed based on where it came from. Interest income distributed by an InvIT is taxable at your slab rate.

Dividend income it distributes from SPVs is taxable at your slab rate, if the SPV has opted for a concessional tax regime. Capital gains on listed InvIT are taxed at a short-term rate of 15 per cent plus surcharge if held for less than 36 months and long term gains at 10 per cent if held longer. Overall, InvIT can make your tax filings quite a chore.

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Should you invest in IndiGrid NCD?

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BL Research Bureau

IndiGrid Trust (IndiGrid), a power sector infrastructure investment trust (InvIT), is offering redeemable Non-convertible debentures (NCD) to the public from April 28 and will close on April 30, 2021.

The company is offering NCDs for 3-, 5-, 7- and 10-year timeframes with only non-cumulative option. The rates of interest offered for these time periods are 6.75 per cent, 7.6 per cent, 7.9 per cent and 8.2 per cent per annum respectively. These rates are in case of NCDs with annual interest pay-out schemes. The company also offers quarterly coupon payment option for 7- and 10-year NCDs, in which case the applicable interest rates are 7.69 per cent and 7.97 per cent respectively.

If you are a unitholders of the Trust as on the date of allotment, an additional incentive will be paid at the rate of 0.05 per cent, 0.10 per cent, 0.15 per cent, and 0.20 per cent per annum for 3-,5-,7- and 10-year NCDs respectively.

The amount required to be invested in each case is a minimum of ₹10,000 (10 NCDs), and in multiples of ₹1,000 thereafter. The NCDs in this issue are secured debentures. To put that in perspective, the claims of the NCD Holders shall be superior to the claims of any unsecured creditors of the company, subject to conditions.

The NCDs are proposed to be listed on BSE and NSE.

Oversubscribed?

The overall NCD issuance of ₹100 crore from IndiGrid has been oversubscribed by about 21 times. Amongst this, the retail category – where bids are for an amount not more than ₹2,00,000 – has been subscribed 9.7 times, at the time of publishing this.

The greenshoe option – option to retain over-subscription amount- of ₹900 crore allows total subscription under each category to go up to ten times.

Thus, retail investors still have an option to apply for the company’s NCD issue.

The allotment of the NCD is based on first come first serve basis. However, in case of over-subscription, full allotment of the NCDs to the applicants on a first come first basis will be made up to the date prior to the date of over-subscription and proportionate allotment thereafter.

Look before you leap

The interest rates on NCD offer from IndiGrid across timeframes is mixed compared to most of the debt options in the market now. These are higher than the rates of interest being offered by the banks for fixed-deposits (FDs) of 3-5 years and 5-10 years, which are in the range of 5.1-6.7 per cent and 5.4 to 6.7 per cent respectively, however it is not very attractive versus other debt investment options.

IndiGrid has obtained ‘AAA’/Stable rating from rating agencies – India Ratings and CRISIL. This rating implies that the company has high credit quality and low credit risk. The NCD interest rates offered on 3- and 5- year tenure is mixed compared to one of the top NBFCs (Non-Banking Financial Company) corporate Fixed deposits (FDs) with similar rating– Bajaj Finserv. This FD for a tenure of 36-60 months, offer an interest rate of 7 per cent for annual interest pay-out option. Compared to Indigrid’s NCD issue, the FD is attractive for 3-year tenure but not for 5-year’s.

Also some of the Small Finance Banks (SFBs) offer interest rates in the range of 6.25 per cent to 7.25 per cent in the three to five year deposits. While, these rates are slightly lower than what the NCD offers, it is commensurate to the risk as SFB deposits are covered by the Deposit Insurance and Credit Guarantee Corporation of India. Each depositor is insured up to ₹5 lakh for both principal and interest, while the NCDs are not.

Further, at 6.8 per cent, government-backed NSC (National Savings Certificate) offers a better return than the IndiGrid’s 5-year NCD, for those under the old tax regime. Tax benefits on initial investment of up to Rs 1.5 lakh and on the interest when reinvested under 80C, will imply an even higher yield, which makes NSC more attractive.

However, these rates are higher than those offered by listed NCDs in the secondary market with similar rating. For instance, AAA rated taxable bonds such as Tata Capital Finance and NTPC with residual maturity of 6.35 years and 3.93 years has YTM (yield to maturity) of 6.79 per cent and 5.67 per cent respectively.

In case of 7-year time frame, Floating Rate Savings Bonds, 2020 (Taxable) is a comparable product. Interest rate on this instrument is 35 basis points above the NSC rate and thus, currently offers 7.15 per cent. Though, it currently looks lower than the offer by IndiGrid, as the interest rates on NSC bonds will be reset every six months, the interest rate may go up with interest rates in the economy going up.

Considering the low interest rate cycle, investors looking for some diversification, and with an appetite for risk, can invest in the three-year NCD offered by IndiGrid. Investors are recommended to park only a portion of their surplus in this as other options may come up sooner than later, considering that the interest rate cycle would be on its way up sometime in future given inflation concerns in global and domestic markets . The differential between rates offered on bank FDs and other AAA rated corporate /NBFC deposits vis-à-vis IndiGrid’s NCD may narrow down going ahead. Hence, you are likely to get opportunities to reinvest the money you now put in the three-year NCD, in less risky instruments at attractive rates down the line.

About the company

India Grid Trust (IndiGrid) is the country’s first listed power sector infrastructure investment trust (InvIT), set up in 2016. Sponsored by the global investment firm KKR and private power transmission company Sterlite Power Transmission, IndiGrid was set up to own and operate power transmission and renewable energy assets in India. Revenue to the company depends on the transmission systems being available for transmitting electricity, most of the time. IndiGrid has been acquiring power transmission assets at a healthy pace over the past few years. From owning five power transmission projects comprising 3,361ckm of transmission lines and 6,000 MVA of transformation capacity to start with, this has gone up to 13 operational power transmission projects comprising 7,570 ckm of transmission lines and 13,350 MVA of transformation capacity, between March 2018 and 2020. Accordingly, revenue (power transmission income) multiplied nearly 2.8 times from ₹448 crore to ₹1,243 crore during the same period. IndiGrid’s assets under management stand at about ₹20,000 crore today. The proceeds from the NCD are expected to be used for onward lending to the portfolio assets, financing and for repayment /prepayment of interest and principal of existing borrowings and for other corporate purposes.

The current consolidated debt-to-equity ratio (before NCD) stands at about 0.6 times.

The government’s focus on strengthening the country’s power transmission infrastructure should also provide ample growth opportunity for players in the Indian power transmission sector.

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