New issuances of Infrastructure Investment Trusts (InvITs) have dried down, after the public issues of two trusts – IRB InvIT and India Grid Trust – at the start of FY 2018. According to ICRA, this has happened as developers have deferred plans and are in a wait-and-watch mode, which can be attributed to multiple factors with the key ones being subdued investors’ interest and taxation-related anomalies.
ICRA further said the dismal market performance of these InvITs, with both of them trading below their initial issue price, has not escaped investors’ attention. “After the initial experience, investors are bound to expect higher yield for new InvIT issuances. While both these InvITs are targeting an annual distribution yield of 11-12 per cent, it also includes return of capital, in addition to the returns in the form of interest/dividend,” ICRA vice-president and sector head, corporate ratings, Shubham Jain said.
He said the adjusted dividend yield for investors in some cases, can be significantly lower than the distribution yield. “While in certain assets, there can be an increase in distribution yield, complexity and uncertainty involved in cash flow projections, along with the limited track record of InvITs, may hold back investors from it,” Jain added.
Another issue which is adding to the dilemma of the prospective InvITs issuers, is the need for clarity on taxation. “While a majority of the taxation-related issues for InvITs have been resolved, some ambiguities, specifically sections 50CA, and 56(2)(x) of the Income-Tax Act remain, which raise an issue,” Jain said. Due to this, in some cases, there can be double taxation on both, the sponsor and the InvIT, in case the transfer value is lower than the derived FMV. “To avoid this, while transactions can happen above the fair market value, this in turn would adversely impact InvIT’s yield and consequently investors’ interest,” he added.