Circular No.: SEBI/HO/DDHS/DDHS-PoD/P/CIR/2024/10 | February 08, 2024
In the recent revision to the pricing methodology for privately placed Infrastructure Investment Trusts (InvITs) institutional placements The Securities and Exchange Board of India represents a noteworthy step towards streamlining capital raising, addressing industry concerns, and stimulating infrastructure development. Hence in this article I will be analyzing the notification of SEBI with respect to changes, their implications, and potential outcomes.
Some terms of notification:
InvITs: Infrastructure Investment Trusts (InvITs) are a relatively new but increasingly important financial instrument in India that aims to bridge the gap between investors and infrastructure projects. Similar to mutual funds, InvITs pool funds from investors and invest them in operating infrastructure assets across various sectors like roads, energy, power, ports, etc which gradually generates income through user fees, dividends, and other contractual arrangements associated with the underlying assets. As we know directly owning infrastructure assets is not a cup of tea for middle-class individuals or investors, So, these investors hold units of the InvIT, allowing for easier entry and exit from the market
Currently, there are two types of InvIts, they are Listed InvITs which are traded on stock exchanges, offering liquidity and wider accessibility to investors and other is privately placed InvITs which is offered to a limited pool of qualified institutional investors.
This notification deals with privately placed InvITs as it’s tough to determine it’s pricing in the real world, for determining the revised Pricing Methodology, SEBI recently changed the pricing for institutional placements of privately placed InvITs, setting the floor price at the Net Asset Value (NAV) per unit, but what is the significance of the same? The significance is that it aims to simplify the process and align pricing with intrinsic value
Now let’s discuss its criticisms and challenges:
The first one is it has a limited track record, the InvIT market is still unexplored and recently came into the market, with limited historical data for investors to assess risks and returns, but it is diversifying their portfolio
Secondly, there are some liquidity concerns in the minds of investors, while listed InvITs offer some liquidity, privately placed ones might face challenges, impacting investor exit options, like privately placed investors lack a readily available secondary market, hence they cannot simply sell their units on an exchange, making it difficult to find buyers and exit their investment when needed, making it time-consuming and complex process
Thirdly, Some regulations can be complex and cumbersome, potentially hindering their growth and competitiveness, others are due to the lack of a transparent market price discovery mechanism, privately placed InvITs may be sold at a discount to their NAV, especially if there are few interested buyers, this might reduce investor’s overall return and many more
Future of InvITs
InvITs hold immense potential to fuel India’s infrastructure boom, offering stable returns to investors. However, liquidity hurdles, complex regulations, and limited awareness hinder their full impact. Addressing these challenges through dedicated secondary markets, investor education, standardized practices, and flexible lock-ins can unlock their true potential, accelerating growth and making them a win-win for both infrastructure development and investor returns.
One needs to delve into both listed and privately placed InvITs, compare key metrics like NAV, yield, sector focus, and liquidity options, and explore platforms like NSE Indices and Value Research to identify specific examples and conduct detailed comparisons, Analyze the performance of existing InvITs across the different sectors like roads, power, and renewables. Use resources like SEBI’s website and industry reports to track historical returns, risk profiles, and sector trends and gain a thorough understanding of the SEBI regulations governing InvITs. Investigate recent changes like the revised pricing methodology and potential future reforms being discussed and explore official documents and media sources for in-depth information
Previous Pricing: Based on the average of weekly high/low closing prices of listed units, There were the raising concerns about the relevance for unlisted InvITs, due to the above limitations I quoted in this article
SEBI’s Revisions and Key Implications:
– NAV-based Floor Price: The new methodology sets the minimum price for institutional placements at the InvIT’s NAV per unit, determined by a full valuation of its assets which enhances transparency and aligns pricing with the intrinsic value of InvITs
– Tailored for Privately Placed InvITs: Listed InvITs have readily available market prices based on their stock exchange listings. However, privately placed InvITs don’t trade publicly, making standard price discovery mechanisms inapplicable, hence unlike these listed InvITs, they lack stock market benchmarks. NAV-based pricing offers a relevant and objective mechanism for private placements, this will bring greater transparency and objectivity to the pricing of privately placed InvITs. This can potentially enhance investor confidence, facilitate smoother fundraising, and ultimately contribute to the growth and development of the InvIT market in India
– Ease of Doing Business: It refers to the simplicity and efficiency of regulations and processes for starting and operating a business in India. It encompasses factors like bureaucratic hurdles, licensing requirements, tax complexity, and access to capital. A higher ranking indicates fewer obstacles and a friendlier environment for businesses to flourish, potentially leading to economic growth and job creation. Reducing regulatory hurdles by simplifying the pricing process encourages faster fundraising, potentially lowering capital costs for InvITs.
– Investor Confidence: Transparency and objective pricing can attract more investors, including foreign investors boosting liquidity and overall economy and market development, leading to job creation
Additional Considerations and Potential Impact:
While NAV-based pricing offers transparency, it exposes investments to potential fluctuations in the value of underlying assets. This volatility could translate to price variations in both listed and privately placed InvITs. Investors accustomed to the relative stability of fixed-income instruments might need to adapt their risk tolerance and investment strategies to accommodate these potential swings. Additionally, short-term fundraising strategies for InvITs could be impacted by fluctuations in NAV, requiring issuers to adjust their approaches based on market conditions.
While the revised pricing methodology directly targets privately placed InvITs, its broader context necessitates monitoring its potential spillover effects on listed ones. Since both types share similar economic fundamentals, fluctuations in privately placed InvITs due to NAV changes could influence investor sentiment towards listed counterparts.
This necessitates close observation of investor behavior and potential correlations between the two markets. Furthermore, the possibility of arbitrage opportunities arising from discrepancies between NAV-based prices and listed prices warrants further analysis. Identifying and understanding such opportunities could be crucial for investors seeking to navigate the changing market dynamics.
By comprehensively understanding these potential challenges and opportunities, stakeholders can better adapt their strategies and investments to capitalize on the evolving InvIT landscape.
What is arbitrage opportunity? Arbitrage is a condition where you can simultaneously buy and sell the same or similar product or asset at different prices, resulting in a risk-free profit
The amendment by SEBI (bare act):
Accordingly, the pricing for listed InvITs stand modified as underso that privately placed InvITs can undertake institutional placement based on the NAV of the assets of the InvIT
Paragraph 7.9.1 of the SEBI Master Circular for InvITs dated July 06, 2023, is modified as given below: The institutional placement by public InvIT shall be made at a price not less than the average of the weekly high and low of the closing prices of the units of the same class quoted on the stock exchange during the two weeks preceding the relevant date. Provided that the public InvIT may offer a discount of not more than five percent on the price so calculated, subject to the approval of unitholders through a resolution as specified in para 7.2.1. Explanation: The “relevant date” for the purpose of clauses related to institutional placement shall be the date of the meeting in which the board of directors of the investment manager decides to open the issue
Insertion of Paragraph 7.9.2 to the SEBI Master Circular for InvITs dated July 06, 2023: “The institutional placement by privately placed InvIT shall be made at a price not less than the NAV per unit, based on the full valuation of all existing InvIT assets conducted in terms of InvIT Regulations.”
This circular shall be applicable with immediate effect
This circular is being issued in the exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992, and Regulation 33 of the InvIT Regulations. This circular is issued with the approval of the competent authority
With immediate effect, SEBI revised its pricing methodology which marks a positive step towards a more efficient and investor-friendly InvIT ecosystem. While potential challenges exist, the overall impact is expected to be positive, accelerating infrastructure development and attracting diverse investments. Ongoing monitoring and adjustments might be necessary to ensure the revised system functions as intended and delivers its intended benefits to all stakeholders
Do comment below with your views, are you planning to invest in InvITs?
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