PowerGrid Infrastructure Investment Trust (PGInvIT)

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State-owned Power Grid Corporation of India (PGCIL) launched its infrastructure investment trust (InvIT).

Background 

• The Union Cabinet in September 2020 approved monetisation of PGCIL’s assets through the InvIT model.
  • The InvIT route was proposed by the government as an alternative fundraising route for state-run companies to manage their funding requirements without having to depend on government support.
• This is the first time PGCIL is monetizing its infrastructure assets through the InvIT route.
• This will be only the third InvIT to be listed in the Indian markets, after IRB InvIT and India Grid Trust, both of which went public in 2017.

Data Analysis:

• PGInvIT has offered a price band of Rs 99-100 per unit for the public issue. 
• The InvIT will raise Rs 4,993.5 crore as fresh issuance and PGCIL is also providing an offer for sale (OFS) of Rs 2,742 crore of existing units. 

• The net proceeds will be used to provide loans to the initial portfolio assets for repayment or pre-payment of their debt, including any accrued interest, and for general purposes.

About Infrastructure Investment Trust (InvIT)

• It is a Collective Investment Scheme similar to a mutual fund.
• It enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return.
• InvITs work like real estate investment trusts (REITs) in features.
  •  InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector
• The InvITs are regulated by the SEBI (Infrastructure Investment Trusts) Regulations, 2014.

• An InvIT consists of four elements:
  • Trustee: He inspects the performance of an InvIT is certified by Sebi and he cannot be an associate of the sponsor or manager.
  • Sponsor: They are people who promote and refer to any organisation or a corporate entity with a capital of Rs 100 crore, which establishes the InvIT.
    • They jointly have to hold a minimum of 25 per cent for three years (at least) in the InvIT, excluding the situations where an administrative requirement or concession agreement needs the sponsor to hold some minimum percent in the special purpose vehicle. 
  • Investment Manager: Investment manager is an entity or limited liability partnership (LLP) or organisation that supervises assets and investments of the InvIT and guarantees activities of the InvIT. 
  • Project Manager: Project manager refers to the person who acts as the project manager and whose duty is to attain the execution of the project and in case of PPP projects. 

Advantages of InvITs

Diversification: InvITs with multiple assets offer individuals an opportunity to diversify their investment portfolio. 

• Such a feature directly helps lower associated risks and further allows investors to generate steady returns in the long run.

Fixed income: The option to redistribute risks and accrue a fixed income serves as a potent alternative for generating fixed income, especially for retirees. 

• Also, including such an investment tool would help those who intend to plan retirement effectively.

Liquidity: Generally, it is easy to enter or exit from infrastructure investment trust, which directly enhances their liquidity aspect. 

• However, small investors may find it challenging to sell a high-valued property quickly.

Disadvantages of InvITs

Regulatory risk: Even the slightest change in the regulatory framework like taxation or policies concerning the infrastructure sector would have a ripple effect on InvITs.

Inflation risk: A high rate of inflation has a significant impact on the performance of infrastructure investment trusts.

•  For instance, inflation may increase the sector’s operating cost. Further, an increase in the toll rates would lower the prospect of generating substantial returns.

Asset risk: Typically, investment in infrastructure has a long gestation period, and hence the process of generating returns is often delayed. 

• Such a delay not only takes a toll on the cash flow but further hampers profit projections.

Source :BS