REITs and InvITs driving the future of Indian Infrastructure

V Nagarajan

The current Indian economy has a sizeable dependence on infrastructure as a vehicle of growth. Infrastructure-based sectors such as roads, highways, and ports, along with the power and real estate sectors have witnessed growing demand for capital in recent times.

As a result, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have attained importance in furthering the economy’s infrastructure needs, according to a survey by EY India.

The Government’s National Infrastructure Pipeline estimates funding requirement of over $1.4 trillion by 2025. REITs and InvITs have raised capital of over $4 billion in India and the combined market-cap of the three listed REITs in India is over $7 billion and over $10 billion for InvITs.

Thus, the early trends of performance of REITs and InvITs are encouraging.

Investment of private sector of $325 billion in infrastructure would be necessary to meet the National Infrastructure Pipeline’s estimate. In order to allow for capital recycling and further investments under PPP modes, InvITs play a key role in monetisation of existing projects in some of these sectors (with conducive regulatory frameworks, cash flow profile, taxation advantage).

According to EY India survey, real estate sector in India is expected to reach a market size of US$1 trillion by 2030.

Despite the near to medium term headwinds from COVID-19, long term drivers for real estate demand are strong and likely to withstand current adversities. The REIT/InvIT route could potentially mitigate several investment challenges in the infrastructure sector.

For example, when REIT/InvIT help developers release their invested equity and deployed capital in new projects they could enable the challenge of projects with high capital expenditure demands. Similarly, the self-amortising nature of units provide convenient exit options to investors, thereby overcoming challenges which investors typically face with limited options.

Besides the obvious advantages, REITs and InvITs enable efficient upstreaming of cash owing to certain regulations and the Government’s beneficial tax regime. In India, REITs and InvITs have also successfully tapped into global capital and infrastructure assets.

Tax implications for REITs and InvITs

From a tax perspective, REITs and InvITs are pass-through vehicles under income tax rules and income (in the form of dividends and interest from underlying assets) is fully exempt. The distributions made by investment trusts are taxed directly in the hands of investors depending on the nature of such distributions (dividend, interest or capital repayment). REITs and InvITs have different income tax implications for sponsor, unit holders and the REIT or InvIT, at various stages.

The Government, SEBI and other regulators have played a proactive role in popularising and promoting REITs and InvITs in India. Sponsors/management have an important role in establishing high standards of corporate governance which is a pre-requisite for any investment.

REITs and InvITs are conceptually like mutual funds, where a sponsor raises capital and invests them in infrastructure or real estate projects. With the Indian economy’s sizeable dependence on infrastructure, they have attained importance in furthering its infrastructure needs. The Government, SEBI and other regulators have played a proactive role in popularising and promoting REITs and InvITs in India.

My father has not left any Will and my sister claims that she has same rights over the property. What is the legal position? Kindly clarify. Prahalad Joshi, Sharjah.

Yes as your father died intestate i.e. without leaving a Will. Your sister, being class I legal heir, has the same right as you have over the properties as per Section 8 of the Hindu Succession Act, 1956.

I am one of the legal heirs to the property in the family. How to obtain a legal heir certificate for the immovable property left by my parents in India as there is no consensus among children besides a split in the family? Please advice. Sharan Gouda, Dubai.

You can apply for legal heir certificate to the Tehsildar of the concerned area where the property is located. You will have to include details such as the name of the deceased, date of death along with a copy of the death certificate obtained from appropriate authorities. There is a need to mention details of persons who were legal heirs at the time of death with their contact addresses. The Tehsildar may conduct an enquiry and will issue a consolidated certificate for the heirs succeeding to the estate.