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REITs and InvITs

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Asset Sales & Acquisitions in Infrastructure Sector

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Real Estate Investment Trusts and Infrastructure Investment Trusts

May 2, 2017

  • The real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) market is finally gaining traction with many real estate and infrastructure firms looking to raise funds through these instruments. This has been made possible following a number of policy amendments and regulatory changes introduced by SEBI, which have helped address the concerns of developers. These instruments are expected to encourage foreign investments, reduce the burden on the banking system and provide a platform for developers to monetise their operational assets.

  • Some of the key amendments introduced by SEBI to facilitate investments through these instruments in 2016 include permitting investments in a two-level SPV structure through a holding company (subject to sufficient shareholding in the holding company and the underlying SPV), removing the limit on the number of sponsors, and permitting the holding company to distribute 100 per cent of the cash flow realised from the underlying SPVs and at least 90 per cent of the cash flow realised otherwise.

  • The mandatory sponsor holding for InvITs has also been reduced from 25 per cent to 15 per cent, private placement requirements have been rationalised, and disclosure of financial and operational information has been made mandatory prior to the listing. As for REITs, up to 20 per cent investment has been permitted in under-construction projects (from 10 per cent earlier).

  • More recently, in February 2017, SEBI notified norms allowing mutual funds (MFs) to invest up to 10 per cent of their net asset value (NAV) in units of REITs and InvITs (investments in units by a single issuer cannot exceed 5 per cent of the NAV).

  • Such developments have led to a number of infrastructure companies to set up these structures. Companies such as Sterlite Power, ITNL, MEP Infrastructure, GMR and Reliance Infrastructure have secured SEBI's approval to establish InvITs. IRB Infrastructure's proposed IRB InvIT Fund has also received SEBI's approval to launch an IPO for raising about Rs 43 billion. The Adani Group, and Tata Realty and Infrastructure are other players planning to explore this route.

  • Real estate developers are also moving ahead with their plans to set up these trusts. Recently, Blackstone revealed its plans to list two separate REITs for its office assets, in collaboration with Panchshil Realty Embassy and Property Developments Private Limited. DLF Limited, RMZ Corporation and K. Raheja Corporation are other companies that are exploring the option

  • The listing of REITs has become attractive, especially after demonetisation. The transfer of liquidity from the informal sector to banks has compressed government bond yields. This has reduced the capitalisation rate for prime office assets and enhanced their valuation, providing a strong case for listing of REITs. Falling interest rates will also enhance the returns from these structures.

  • Meanwhile, SEBI is yet to clarify the categorisation of MFs that have been recently allowed to invest in these structures. The Insurance Regulatory and Development Authority is also likely to spell out rules for insurance companies to make such investments.

  • Going ahead, eased regulations and the encouraging response from the industry reflect a positive outlook for these instruments. Besides, clarity awaited on investment guidelines for MFs and insurance companies is likely to provide a further momentum. However, the success of these structures will depend on the credibility of the sponsor or investment manager and on the commercial income of the underlying assets.

  • The mission of this conference is to discuss the regulatory amendments and their impact, to examine the key challenges in the implementation of such structures, and to discuss the future potential and prospects..

Asset Sales and Acquisitions in Infrastructure Sector

May 3, 2017

  • Since the past 15-20 months, the infrastructure sector has witnessed a major surge in asset acquisitions. While some companies are offloading such assets to deleverage their balance sheets, others are doing so to shift their business strategies to increase market shares. Over 80 transactions worth at least Rs 900 billion have been finalised since January 2015.

  • The acquisitions have been most prominent in sectors such as roads, power, construction and cement, where a large number of players are looking to deleverage. In the road sector in particular, a number of companies have exited the BOT space by monetising operational BOT projects, in a bid to shift the focus back to the EPC space.

  • Some of the key infrastructure players that have offloaded operational assets are Soma Enterprise, Madhucon Projects, Ramky Infrastructure, NCC, Gayatri Projects, GMR, ITNL, Gammon, Jindal Steel and Power, and Jaiprakash Associates. Others that are moving ahead with similar plans include Sadbhav Infrastructure Projects, GR Infraprojects, Jindal India Thermal Power Limited, KSK Energy Ventures and Essar Power

  • The response from buyers has also been encouraging, as investors are looking to purchase these revenue-generating assets to diversify their portfolios. Interest has been seen across various investor classes, including PE firms, foreign pension and insurance funds, as well as sovereign wealth funds.

  • In the PE space, entities such as IDFC Alternatives, the Macquarie Group, and I Squared Capital are actively pursuing such transactions. The Canada Pension Plan Investment Board (CPPIB), Caisse de depot et placement du Quebec (CDPQ), and the Public Sector Pension Investment Board (PSP Investments) have also stepped up investments in the infrastructure space in recent months.

  • Distressed infrastructure projects are also generating significant interest. Asset reconstruction companies (ARCs), global investors, and more financially robust infrastructure developers are purchasing such assets through strategic debt restructuring (SDR) and S4A schemes.

  • The RBI too has played its part in facilitating the offtake of stressed assets. In September 2016, it allowed NBFCs, financial institutions and other lenders to buy stressed assets from banks. Earlier, only ARCs and securitisation companies were permitted to do so. Schemes such as S4A and SDR are expected to fare better following the apex bank's announcement.

  • Investors are approaching such assets either through direct acquisitions, or through purchasing stakes in ARCs. In addition, new investment platforms and joint ventures are being formed, specifically targeted at taking exposures in stressed assets. CDPQ-Edelweiss, Piramal Enterprises-Bain Capital, and Kotak Mahindra-CPPIB are a few examples of such tie-ups.

  • Meanwhile, the scenario with regard to valuations is also improving as pricing is appearing more realistic than what prevailed two to three years back. Global investors too are bullish on the Indian market, prompted by limited investment opportunities globally.

  • Going forward, asset acquisition deals are likely to continue, buoyed by a wide range of investors scouting for such assets and providing a ready market to infrastructure companies looking to deleverage. Valuations, however, will be a key factor in the finalisation of these transactions

  • The mission of this conference is to examine the recent trends and developments in infrastructure acquisitions, to share the experience so far, and to discuss potential opportunities and challenges.
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