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Infra Trusts Regime: Competitive Enough?

Published on Sat, Jul 26,2014 | 14:41, Updated at Sat, Jul 26 at 14:41Source : CNBC-TV18 |   Watch Video :

Fortis, Indiabulls and Ascendas have done it successfully. And names like Reliance Communications, L&T, IL&FS and Mytrah Energy have toyed with the idea in the last couple of years- Singapore has become the chosen destination for India Inc. to monetize their infrastructure assets via Business Trust listings. It is perhaps this export of India’s capital market that prompted the announcement of form of Infrastructure Investment Trusts in the Budget this year…which was promptly followed by SEBI’s draft regulations. Payaswini Upadhyay asks experts if SEBI’s intended framework is competitive enough.

Last year, issuers raised $1.3 bn via Business Trust listings in Singapore. The current market capitalization of Singapore business trusts is a little over 15 billion dollars. India Inc too has been drawn to Singapore for such listings- in 2007 Ascendas India Trust went public as Singapore's first listed business trust holding Indian IT park assets. In 2008, Indiabulls Properties Investment Trust listed on the Singapore Stock Exchange with commercial property in Mumbai as the underlying asset. Fortis-sponsored Religare Health Trust listed on the Singapore Stock Exchange 2 years ago with businesses of healthcare services as underlying assets.

Back home Budget 2014 took the first step to reclaim this market as the The Finance Minister signaled the entry of Infrastructure Investment Trusts or InviTs

Siddharth Shah
Partner, Khaitan & Co.
“I think it’s a platform which has now been created by the government to allow developers on infrastructure, banks and other constituents of the economy to have an alternate source of capital to refinance some of their exposure to infrastructure assets. So from an intent perspective and from a long-term perspective, definitely the country should benefit out of it.”

Soon after the Budget announcement, market regulator SEBI issued its draft regulations for InviTs. Permitted entities can set up an infrastructure Trust and invest in infrastructure assets in sectors like transport, energy, water sanitation, communication, social and commercial sectors. The Trust would then be allowed to invest in infrastructure projects either directly or through an SPV. Where PPP projects are involved, the investment can be made only via an SPV.

Arvind Mahajan
Partner- Infrastructure, KPMG
“What is more important from the point of view of the definition is that there should be sufficient number of projects under operation- so that really depends on the maturity profile of the sector and therefore sectors such as roads which came into operation and have many more operating projects are more amenable to having projects under this structure compared to something like power; though by definition power is also covered.”

In terms of structure, SEBI’s draft guidelines mirror the existing framework in jurisdictions like Singapore, Hong Kong and Malaysia. But some differences lie in areas like mandatory listing and investment restrictions.

SEBI’s draft guidelines give InvITs the option to raise money via a public offer or a private placement. But both have to be mandatorily listed. Singapore, on the other hand permits unlisted Business Trusts. While Singapore, Malaysia and Hong Kong place no investment restrictions on InvITs, SEBI’s draft guidelines place several conditions. For instance- InvITs that propose to invest more than 10% of the value of their assets in under-construction projects can raise money only via private placement from QIBs. They are also required to mandatorily invest in at least one revenue generating project and one pre- commercial operations date project which has also been defined.

Arvind Mahajan
Partner- Infrastructure, KPMG
“There might be some legal issues which need to be addressed when the sponsor transfers PPP projects to an Infra Trust; so to ensure that the current concession agreements permit him to make such transfers. So there would be some relaxations needed there. There are some issues on Stamp duty- the waiver of that in some form.”

Besides competing with other jurisdictions, experts say InviTs face competition from domestic products too.
Siddharth Shah
Partner, Khaitan & Co.
“I think SEBI also needs to recognize that this regime may, in some sense, may actually compete with the AIF regime where you have given a lot more flexibility for a AIF in terms of the operational flexibility or in terms of governance side of it- today also an AIF can invest in all forms of infra assets – whether completed or not. Somewhere SEBI needs to recognize that they need to provide enough incentives for people to explore this regime – listing is definitely one of them though AIF can also be listed but we haven’t seen any precedents while this is by very nature a listed product. So somewhere this will compete with AIFs in the short term or AIFs will become a feeder into InviTs and may be that is how the regulator may have looked at that where people will take development risk, private equity risk and ultimately for an exit, they may come back and put it into an InviT.”

But the biggest pain point lies outside SEBI’s purview- tax! Just like REITs, InviTS have been given a pass through status meaning the interest income will be non-taxable in the hands of the business trust and there will be no withholding tax at the SPV level. But when this interest income is distributed to non-resident unit holders, it will attract a withholding tax of 5% and 10% in case of resident unit holders. When the income reaches the unit holders, it will be taxed in their hands as Dividend Distribution Tax. 

Siddharth Shah
Partner, Khaitan & Co.
“Pass through is only a partial pass through to the extent of interest income. So for example, capital gains which is being taxed at the Trust level – there may not be any credit available for the investors against any capital gains or losses or their ability to claim any Treaty benefit against this. And that could, at some level, be a dampener if you compare it to regimes like AIF.”

Gaurav Karnik
Partner, Tax, EY
“I think there is some work that needs to be done of the tax front. Even though there is a deferral on the transfer of shares to the Trust, there is a Minimum Alternate Tax which is payable by the corporate sponsor. So that’s an immediate cash payout. Secondly, when the deferral happens, say the share value was Rs 10 and at the time of transfer, the value was Rs 100, then what is being deferred to a later date should be 90. But what really happens is if we sell it two years later and there is a unit appreciation from Rs 100 to Rs 120, you get taxed on the entire Rs 120 minus Rs 10. So you’re even taxed on the appreciation of the unit.”

And here’s wherein the Indian InviTs regime fades in comparison to Singapore, Malaysia and Hong Kong that only levy a corporate tax on business trusts. Distribution by Trusts and income of unit holders is tax exempt. So even though SEBI’s intended regulatory framework is competitive, issuers may still flock to tax friendly foreign jurisdictions.

In Mumbai, Payaswini Upadhyay


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