NHAI InvIT: How India Is Monetising Public Assets Without Selling Them

The National Highway Authority of India's (NHAI) Infrastructure Investment Trust (InvIT) recently floated an issue of non-convertible debentures (NCDs). The issue was oversubscribed seven times over its actual size, filling it up right on the first day and raising Rs 1500 crores. 

A quarter of the issue was subscribed by retail investors. The minimum application size has been kept low at Rs 10,000 so that retail investors find it easier to invest in the issue. 

Though the government or the NHAI does not guarantee the bonds, they are secured by the underlying assets – meaning that the underlying assets will be sold off in case of bankruptcy. The bonds offer a coupon of 7.9 per cent paid semi-annually – effectively 8.05 per cent a year.

 How is NHAI Monetising Assets?

When the InvIT was first launched in 2021, it had raised Rs 8,011 crore from institutional investors. 

The initial money raised by the InvIT went towards acquiring the first five assets of the portfolio consisting of five toll road assets with a cumulative length of 390 Kilometres. But three new assets have been added to the portfolio, taking the cumulative length to 636 kilometres. 

The NHAI InvIT would use the money it raises from investors and lenders to pay the sponsor, NHAI. In return, NHAI would hand over its highway assets to the trust. The InvIT will collect tolls over the concession period, which will be used to pay back the NCDs. As a result, investors get an opportunity for stable returns through interest and principal payments, while NHAI receives money upfront without giving up ownership of the projects. 

The other mechanism used by NHAI to monetise its assets is the toll-operate-transfer (TOT) model, under which institutional investors make an upfront payment to NHAI and collect tolls during the concession period. 

NHAI is stepping up asset monetisation as the government seeks to recycle existing public capital to create new infrastructure without waiting decades to recoup the investment. At the same time, the ownership of the assets remains in the hands of the government, while only the cash flows generated by these assets during the concession period are monetised. 

NHAI's share in the National Monetisation Pipeline stands at 27 per cent, making it a crucial player in the government's monetisation plan.

Pros and Cons of the NCDs

The bonds have a triple-A rating from credit agencies, marking them as safe investments for investors with low credit risk. The three tenors offered are 13 years, 18 years and 25 years. The investment tenor is quite long, which adds some element of risk as predicting interest rates so far into the future is quite difficult. 

A bond's value changes with changes in interest rates, and interest rate changes add an element of possible opportunity costs. On the other hand, the NCDs offer an opportunity to lock in at a long-term interest rate, which is higher than the expected inflation rates in the future. 

In addition, unlike usual bonds, the principal repayment will not be a lump sum but a staggered pay-out. So the bond with a tenor of 13 years would pay full interest until the end of the 8th year and then begin re-paying the principal, making interest payments lower each year as the principal amount decreases. The bonds are also taxable, making the actual returns lower than the headline number. 

Selling the bond within less than a year of buying would attract short-term capital gains tax, and a bond held for more than a year would attract long-term capital gains tax at 10 per cent without any indexation. Further, India's bond markets do not have the same liquidity as the equity cash and derivate markets, making it relatively more difficult to sell your bonds quickly.

The response to the offering shows retail investors' enthusiasm for bond issues. So far, the bond market has been concentrated in the hands of institutions. Increasing retail participation is a positive sign for the bond markets. The government and corporations could tap the retail investors' wealth base to meet their capital requirements.

What Is The NHAI InvIT, And How Does It Work?