Bridge India

Is there a case for solar InvITs?

InvITs are infrastructure investment trusts set up pursuant to SEBI Regulations 2014 for investment in infrastructure projects. Money raised from InvITs is used to repay external debt and buy back equity investments in underlying project companies. Recently, IRB and Sterlite power successfully launched the first two InvITs for road and power transmission projects by raising INR 50.3 Bn (USD 775 million) and INR 22.5 Bn (USD 345 million) respectively. Other infrastructure and energy asset developers are expected to follow suit later this year.

SEBI regulations mandate a minimum of 80% of assets under an InvIT to be revenue generating for at least a year and at least 90% of distributable cash flow from underlying projects to be transferred to the InvIT unit holders. Thus, unit holders are assured periodic payments from distributable cash flows. An InvIT can only borrow up to 49% of its asset value on a consolidated basis. The overall InvIT structure is akin to a yieldco with tighter regulatory oversight because of its trust structure and attractive tax benefits:

  Tax benefits  
SPV ·         Exemption from dividend distribution tax

·         Interest payments to InvIT not subject to withholding tax

InvIT ·         Exemption from corporate income tax

·         Exemption from dividend distribution tax

·         TDS of 5% (subject to Double Taxation Avoidance Agreement) on interest payments to non- resident unit holders

These tax benefits are worth an estimated additional yield of 0.5–1.0% on total investment.

Some solar developers are also believed to be exploring possibility of launching solar InvITs. Certainly, the structure has some advantages in comparison to conventional IPO route because of the various tax and regulatory benefits. An additional benefit is that by retiring bank debt in existing projects, the InvIT sponsors can free up bank debt appetite for their pipeline projects.

We understand that the IRB InvIT with an enterprise value of INR 59 Bn and average post tax EBITDA of INR 7.3 Bn results in a pre-tax yield of around 12.5% for its unit holders, while Sterlite’s InvIT with an enterprise value of INR 37 Bn and average post tax EBITDA of INR 4 Bn offers pre-tax yield of about 11%. The lower yield expectation from transmission projects is possibly due to their more stable cash flows compared to road projects where revenues depend on traffic growth assumptions. The two InvITs were oversubscribed in primary market, but fall in their prices post listing indicates a stronger yield requirement from the secondary market.

The key issue for solar InvIT feasibility is the return expectation and/or risk perception of solar projects in the institutional investor market, which demands low-risk, stable returns. We expect such investors to seek a higher pre-tax yield (12-14%) from solar InvITs because of the various sector risks – mainly grid curtailment, DISCOM payment risk and long-term plant performance risk. As a result, we believe that the InvIT route will be available only to highly credible developers with strong track record of executing solar projects with best-in-class standards.

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