'Give Tax Breaks, Include Under IBC': NITI Aayog Suggestions On National Monetisation Pipeline

NITI Aayog has given recommendations to the government to make the recently launched National Monetisation Pipeline (NMP) a success.

The NMP estimates an aggregate monetisation potential of Rs 6 lakh crore of the core assets of the Central Government, and will be implemented over a four-year period, from the current fiscal year to 2024-25.

The plan is to engage private sector in brownfield projects, transferring them revenue rights and not ownership. Since, these are brownfield assets, which have been “de-risked” from execution risks, the government argues that it would attract private investors.

The funds so generated will be reportedly used for infrastructure creation across the country. The NMP will run co-terminus with Rs 100-lakh crore National Infrastructure Pipeline. It is expected to provide a clear framework for monetisation and give potential investors a ready list of assets.

Reportedly, roads, railways and power sector assets will comprise over 66 per cent of the total estimated value of the assets to be monetised, with the remaining upcoming sectors including telecom, mining, aviation, ports, natural gas and petroleum product pipelines, warehouses and stadiums.

The government plans to use the Infrastructure Investment Trusts (InvIT) and Real Estate Investment Trusts (REIT) route to monetise public assets. Such trusts are designed to pool small sums of money from a number of investors to invest in assets that give cash flow over a period of time. Part of this cash flow would be distributed as dividend back to investors. InvITs are listed on exchanges through IPOs, just like stocks.

Yesterday, NITI Aayog, the union government’s think tank driving the NMP, gave recommendation to make its implementation successful.

It asked the government to give Income Tax breaks to attract retail investors into instruments such as InvITs.

It said that a critical element for the NMP was scaling up monetisation instruments such as InvITs and REITs and expanding their investor base. It asked the government to bring the required policy and regulatory changes.

“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 said in its blueprint, indicating that further taxation-related tweaks may be needed along the way.

The Section 54EC of the Income Tax Act allows taxpayers to offset long-term capital gains from transactions in immoveable properties through investments in bonds issued by some government-backed infrastructure firms. It currently applies to bonds issued by the National Highway Authority of India, Rural Electrification Corporation, Power Finance Corporation and the Indian Railway Finance Corporation.

“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 a success in the past,” Amit Singhania, partner at Shardul Amarchand Mangaldas & Co., was quoted as saying by The Hindu, adding that this will encourage retail investor participation in InvITs.

NITI Aayog blueprint also called for bringing such trusts within the ambit of the Insolvency and Bankruptcy Code (IBC) to provide greater comfort to investors.

It said that while InvIT structures have been used in India since 2014, 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,” the Aayog said.

Changes to the InvITs structure and regulations are among crucial modifications required to attract retail investors to the National Monetisation Pipeline, say financial experts.

"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,” Aashit Shah, partner at law firm J Sagar Associates, was quoted as saying.

The NITI Aayog also flagged the fact that since Trusts are not considered a ‘legal person’ in NMP guidebook, lenders do not have existing process for recourse to project assets.

“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 stated.

Abhishek Goenka, partner at Aeka Advisors, said that other amendments may be needed to allay concerns of retail investors regarding their investments in such large underlying assets

He suggested including a separate section in the income tax law to provide capital gains tax relief for investments in eligible InvITs specifically holding NMP instead of extending Section 54EC. “The government should provide a high threshold for such tax breaks given the urgent need to push retail participation in these formats,” he added.