Move to improve retail participation in process
To make the National Monetisation Pipeline (NMP) a success, the government should give Income tax breaks to attract retail investors into instruments like Infrastructure Investment Trusts (InvITs), the NITI Aayog has recommended.
The Centre’s think tank driving the NMP, estimated to raise almost ₹6 lakh crore for the exchequer over four years, has also called for bringing such Trusts under the ambit of the Insolvency and Bankruptcy Code (IBC) to provide greater comfort to investors.
Bringing in policy and regulatory changes to scale up monetisation instruments like InvITs and Real Estate Investment Trusts (REITs) and expand their investor base have been identified as a critical element for the NMP. The government plans to use the InvITs and REITS route to monetise public assets like highways, gas pipelines, railway tracks and power transmission lines.
“More tax-efficient and user-friendly mechanisms like allowing tax benefits in InvITs as eligible security to invest under Section 54EC of the Income-Tax Act, 1961, are important starting points for initiating retail participation in the instruments,” the Aayog has said in its blueprint, indicating that further taxation-related tweaks may be needed along the way.
Section 54EC allows taxpayers to offset long-term capital gains from transactions in immovable properties through investments in bonds issued by some government-backed infrastructure firms.
“Though this will entail a cost in the form of loss of revenue for exchequer, the long-term benefits may outweigh the cost as linking investments in specified bonds with the capital gains exemption had proved to be success in the past,” Amit Singhania, partner at Shardul Amarchand Mangaldas & Co. told The Hindu, adding this will encourage retail investor participation in InvITs.
While InvIT structures have been used in India since 2014, the Aayog has pointed out that such Trusts are not considered a ‘legal person’ and cannot be brought under IBC proceedings, deterring lenders from participating.
“Since the trusts are not considered as ‘legal person’ under the extant regulations, the IBC regulations are not applicable for InvIT loans. Hence, the lenders do not have existing process for recourse to project assets,” the Aayog has noted in the NMP guidebook.
“While the 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, the provision of recourse under IBC regulations will bring in added level of comfort for the investors,” it has opined.
Aashit Shah, partner at law firm J Sagar Associates, said extending IBC provisions to InvITs would help lenders access a faster and more effective debt restructuring and resolution option. “However, infrastructure regulators and SEBI would need to work in tandem for a successful insolvency resolution of an InvIT which may involve a change in the sponsor, investment manager and/ or trustee or transfer of an infrastructure asset,” he said.
Apart from InvITs’ inclusion under the IBC, other amendments may be needed to allay concerns that retail investors may have about the safety of their investments in such large underlying assets, said Abhishek Goenka, partner at Aeka Advisors.
Mr Goenka also asserted that a separate section in the income tax law to provide capital gains tax relief for investments in eligible InvITs specifically holding NMP assets would be better than extending Section 54EC, which currently applies to bonds issued by the National Highway Authority of India, Rural Electrification Corporation, Power Finance Corporation and the Indian Railway Finance Corporation.
“The government should provide a high threshold for such tax breaks given the urgent need to push retail participation in these formats,” Mr Goenka said.
Under Indian law, a trust is not a separate legal entity and the assets of a trust vest in the trustee for the benefit of the trust beneficiaries. Any premature winding down or liquidation of a trust is usually subject to the provisions of the trust deed, and in case of regulated trusts, may also need consent of the regulator, Mr. Shah explained.
“InvITs either acquire a project directly or acquire the shares of project company. In the latter case, recourse to the IBC will be available where the lending is to the project company,” he said, but this won’t apply when they undertake direct lending at the InvIT level for funding an acquisition, capital expenditure or promoter contribution.
Simply put, InvITs are structured so as to give investors an opportunity to invest in infrastructure assets with predictable cash flows, while the asset owners can raise upfront resources against future revenue cash flows from those assets, which in turn can be deployed in new assets or used to repay debt.
‘Streamlining operational modalities, encouraging investor participation and facilitating commercial efficiency’ could ensure ‘efficient and effective’ outcomes from the monetisation drive, according to the NITI Aayog.
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