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Another fixed income option for HNIs

Priya Nair / 08 Dec 16 | 06:51 AM

Soon, high networth investors (HNIs) will have another long-term investment option in the fixed income space, one tailored for their needs. India Grid Trust (IndiGrid), an infrastructure investment trust (InvIT), has filed the draft offer document for its initial public issue of units for Rs 2,650 crore. While only 25 per cent or Rs 662 crore is earmarked for non-institutional investors, with a minimum lot size of Rs 10 lakh, it could be a good opportunity for HNIs looking for both portfolio diversification and income. 

An InvIT is typically structured like this: The sponsor transfers the assets to the trust and the cash flows generated by the assets are passed on by the trust to the subscribers or investors. The subscribers get units which represent partial ownership of the trust, much like shares in a listed company. Depending on the pricing of the units, subscribers will get allotment. In the case of IndiGrid, Sterlite Power Grid Ventures is the sponsor and Sterlite Infraventures the investment manager. Axis Trustee Services is the trustee. The company is in the business of power transmission, two assets are operational and the company plans to acquire eight more.

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Experts say investors need to look at three key things while investing in an InvIT — the collateral, guarantees and sources of revenue. In this case, guarantees are sovereign because the company has tied up with the central government for its inter-state transmission business, collaterals are the two operational assets and the cash flow or revenue projection for the next three years look robust, says Prateek Pant, co-founder and head of products and solutions, Sanctum Wealth Management. 

IndiGrid has a rating of ‘AAA’ from all three agencies. The rating does not promise a specific coupon, unlike a bond issue, but describes the quality of cash flows. Harsh Shah, chief financial officer, India Grid Trust: “As the trust is a pass-through vehicle, whatever the trust receives gets passed on to the subscribers in the same form. For example, if the trust has raised Rs 100 and gives a loan to its own Special Purpose Vehicle, the income received as interest on the loan is passed on as interest to unit holders. Similarly, if the trust receives a dividend, it is passed on as dividend." 

The taxation will depend on whether the payout is in the form of dividend (tax-free at the hands of the investor) or interest (taxed on the applicable slab). While there is no contractual obligation on the part of the trust to pay a specific coupon, there is an obligation to mandatorily distribute 90 per cent of whatever income the trust earns. 

“InvIT is envisaged as a distribution product. The trust cannot plough back money into the company. Whatever is earned has to be distributed to subscribers. So, subscribers must look at the projection of cash flow and yield. Internationally, investors look at net three-year yields for such products," says Shah. 

According to experts, since IndiGrid in the power transmission space, it does not have market risk, toll risk, etc. The contracts are long-term and this adds to the credibility of cash flows. The annual yields in the case of IndiGrid are projected to be around 13 per cent, according to the draft prospectus, which might be reset later. However, it is only an indicative number. According to financial planners, as interest rates are falling, the returns seem reasonable. “It is an interesting opportunity for HNIs, as it offers stable returns. Unless there are major changes in the power sector, like complete move towards solar power, the prospects look good," says Pant. 

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