The NITI Aayog, a policy think tank of the Indian government, has put forth a recommendation to adopt policy and regulatory changes to help enhance the usage of Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs). This move is viewed as essential for the success of the National Monetisation Pipeline (NMP).
Understanding the National Monetisation Pipeline (NMP)
The NMP is an initiative introduced by the central government to monetise potential assets estimated at Rs 6 lakh crores over a four-year period from FY 2022 to FY 2025. It is in line with the Prime Minister’s strategic divestment policy that aims to reserve government participation in limited areas while enabling the private sector’s involvement in remaining areas. To achieve this, the government intends to utilise InvITs and REITs for monetising public assets like highways, railway tracks, gas pipelines, and power transmission lines.
NITI Aayog’s Recommendations
The NITI Aayog’s recommendations focus on two core areas: bringing InvITs under the Insolvency and Bankruptcy Code (IBC) and offering tax breaks.
InvITs have been operational in India since 2014. However, they’re not considered a ‘legal person’ hence not falling under IBC regulations. Including InvITs under IBC will provide lenders with a quicker and more effective debt restructuring and resolution option. Currently, lenders are protected under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Recovery of Debts and Bankruptcy Act, 1993.
Offering tax benefits under Section 54EC of the Income-Tax Act, 1961 in InvITs would attract retail investors. Although this may pose a loss of revenue to the government, it could yield long-term benefits that outweigh this cost.
About Infrastructure Investment Trusts (InvITs)
InvITs function in a way similar to mutual funds. They aggregate small amounts of money from multiple investors to invest in assets generating cash flow over time. Portions of this cash flow are distributed back to investors as dividends. InvITs are listed on stock exchanges and hence regulated by the Securities and Exchange Board of India (SEBI). The minimum investment required for an InvIT Initial Public Offering (IPO) is Rs 1 lakh. This makes InvITs a suitable option for high networth individuals, institutional and non-institutional investors.
About Real Estate Investment Trusts (REITs)
REITs are much like InvITs but are linked to real estate instead. They invest in physical real estate that generates income, which, in turn, gets distributed among unit holders. In addition to rents and leases, capital appreciation of real estate also constitutes income for the holders. The minimum subscription limit for REITs is Rs 50,000.
Way Forward
For the successful insolvency resolution of InvITs, infrastructure regulators and SEBI need to work together. This may involve changing the sponsor, investment manager and/ or trustee or transferring an infrastructure asset. Industrial groups have suggested adding a separate section in the income tax law to provide capital gains tax relief for investments in eligible InvITs specifically holding NMP assets. This might prove advantageous over extending Section 54EC. Holistic reforms that streamline operational modalities, encourage investor participation and facilitate commercial efficiency could ensure efficient and effective outcomes from the monetisation drive.