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

The National Highway Infrastructure Trust (NHIT) of the National Highway Authority of India (NHAI) will be raising money from institutional investors through a private issue. The trust will raise Rs 5,100 crore from investors, and the remaining amount would be funded by debt of around Rs 2,000 crore. The company holding the road projects has been valued at around Rs 7,362 crore.

What Is An InvIT (Infrastructure Investment Trust)?

An InvIT is an investment trust created for investors to buy into infrastructure projects with investor funds. Infrastructure companies sell their assets to InvITs as a means to monetise their cash-generating infrastructure assets. InvITs are mandated by the Securities and Exchange Board of India to pay out 90 per cent of net cash flows as dividends. Therefore, investors buy into InvITs, expecting steady cash flows.

Like mutual funds, InvITs have a tiered structure composed of a trustee, a sponsor, a project manager and an investment manager.

The InvIT sponsor is responsible for setting up the InvIT, and appointing a trustee that acts as a fair overseer. The trustee’s job is to flag any concerns or unfair dealings, protecting the interests of the unit-holders. The investment manager decides the capital allocation strategy of the unit-holders’ funds, selecting projects or securities to invest in. Lastly, the project manager focuses on the management, maintenance and building of the projects owned by the trust.

In NHIT’s case, NHAI is the sponsor that has appointed IDBI Trusteeship Services Limited to become the sponsor. National Highways Infra Investment Managers Private Limited is the Investment Manager for the InvIT, while National Highways InvIT Project Managers Private Limited (NHIPPL) is the project manager.

How Does NHAI Benefit?

The government’s National Monetisation Pipeline (NMP) aims to bring in patient capital into the infrastructure sector.

The NMP has two core objectives. Firstly, recycling public capital by monetising existing infrastructure, and using the funds to create new infrastructure. Secondly, private money would bring in efficiency to the operations of these assets, without having to undertake construction risks.

The investors will provide the funds for the InvIT to pay an upfront concession fees to NHAI for the road assets. The concession term for the assets is reported to be around 30 years. These assets generate money through toll payments by the users. For NHAI, such a transaction implies that it wouldn’t have to spend years recouping its investments, depending on debt and budgetary support.

Through asset-monetisation, it receives money upfront, reducing the dependence on debt. The trust has the option to buy other assets from NHAI, creating a strong monetisation pipeline for NHAI. The highway authority had earlier raised money through the toll-operate-transfer basis (TOT basis), and toll securitisation models.

“NHAI has options to raise funds though monetising its operational assets — two bundles of operational road assets have been monetised through the toll-operate-toll (TOT) model. Additionally, two bundles have been bid out in February 2021. NHAI also plans to raise funds through Infrastructure Investment Trust (InvIT) route which is expected to reduce dependence on borrowings,” said a credit analysis report by Crisil dated April 2021.

The transaction is in-line with the government’s plan of retaining ownership of the assets. Only the rights to cash flows will be monetised, not the ownership of the assets.

“NHIT will have a 100% shareholding in the project assets through its 100% subsidiary, NHIPPL. NHIPPL will enter into a concession agreement with NHAI for operations and maintenance of these assets on a TOT basis. Thus, NHIPPL will receive the right of collection of user fee along with operations and maintenance for the underlying project stretches for a period of 30 years in return for an upfront concession fee to NHAI thereby providing long term revenue visibility,” said a credit report by CARE.

Can Retail Investors Buy Into The InvIT?

Unlike other infrastructure investment trusts like Power Grid, the NHIT InvIT is open to only selected institutional investors. The InvIT is potentially attractive for large investors as it is likely to yield good returns in a low interest rate environment. In addition, the portfolio of projects is mature and geologically diversified, reducing the potential risk. The 390 kilometres of road assets are across Gujarat, Telangana, Rajasthan and Karnataka.

The debt-based funding too will be moderate, and well below the regulatory ceiling.

“The debt, proposed to be raised at the InvIT, is likely to be much less than the debt ceiling of 49% of the InvIT’s valuation in line with the SEBI norms,” said a report by India Ratings.

However, the initiative is a step in the right direction. Since the introduction of InvITs, several infrastructure companies have come forward with their own public and private InvITs. These include Reliance Jio, L&T, IRB Infrastructure, Power Grid and Sterlite. The Gas Authority of India Limited is also looking to monetise its gas pipeline portfolio.

The initiative is a win-win for all the stakeholders involved, as the government can recycle money into new public infrastructure assets, while private investors get an opportunity invest in major infrastructure projects.