NEW DELHI: The declaration by the government that distributions made by a Special Purpose Vehicle (SPV) to a Business Trust including Infrastructure Investment Trusts or InvITs out of its current income, on or after the specified date shall be exempt from Dividend Distribution Tax (DDT) effective June 1, 2016 will help improve the potential returns for the investor, thus making InvITs an attractive investment option, said credit rating agency ICRA.
“Over the last two years, through various initiatives, a majority of the road blocks in the launch of InvITs have been cleared and InvITs are now poised to become a reality,” ICRA said.
The key measures taken by the government include relaxation in taxation norms, permitting foreign investments in InvITs under automatic route and the recent guidelines issued by the Securities and Exchange Board of India (SEBI) for public issue of InvITs.
The most critical reform measure has been the pass-through status for InvITs, though this has come in a gradual manner, ICRA said.
“The Union Budget 2014-15 had laid down the taxation regime for InvITs, which provided a pass-through treatment for the interest income received from SPVs. The Union Budget 2015-16 further rationalised the capital gain structure for sponsors. But certain tax inefficiencies like the Dividend Distribution Tax (DDT), has now been addressed in the Union Budget 2016-17. However, to be eligible for this exemption, the InvIT should hold all of the share capital of the SPV, excluding the stake required to be held mandatorily by any other person in accordance with any law or directions of the GoI or any regulatory authority,” it said.
Rohit Inamdar, senior vice president at ICRA said exemption of Dividend Distribution Tax holds greater significance in case of InvITs as in a majority of the cases an InvIT would own infrastructure assets through SPVs.
“This exemption has made InvITs more tax efficient,” he pointed out.
On June 1, 2016 SEBI has published a final consultation paper in this regard and plans to issue regulations after inviting public comments.
The major amendments proposed include allowing InvITs to invest through a two-level SPV structure (wherein InvIT is allowed to invest in a holding company (holdco), which in turn will hold controlling stake in underlying SPV), lowering the mandatory sponsor holding in InvIT from the current 25% to a 10% on a post-issue basis for a period of not less than three years from date of listing, increasing the number of sponsors from three to five, depending on the sponsor holding and aligning minimum public holding with Securities Contracts (Regulation) Rules (SCRR).
Alongside this, the Reserve Bank of India (RBI) has also amended the regulatory framework for foreign investment in investment vehicles, including InvITs, which is a positive from the demand side of InvITs, ICRA said.
“The revised regulations permit investments by non-residents, and foreign portfolio investors in InvITs under the automatic route. Downstream investments by an InvIT is also treated as “domestic investment” as long as the sponsor and the manager both are Indian-owned and controlled. Thus, it eliminates the necessity of complying with sectoral caps, pricing guidelines and reporting requirements, generally applicable to foreign investment,” it said.
Inamdar of ICRA said these measures, including the proposed amendments, make InvIT an attractive vehicle and thereby open up much needed new avenue for funding infrastructure development.
“Many prominent developers have shown interest in floating, which are expected to play a vital role in providing wider long-term refinancing avenue for completed projects, providing headroom for banks to fund new infrastructure projects. Also, besides unlocking developer’s capital, InvITs would provide the sponsors access to capital markets through follow-on offers. On the other hand investors in InvITs will have access to a different asset class that can be publicly traded. However, it could take some time for market acceptance and the overall yield offered on such instruments will be a key factor for attracting investment in InvITs,” he said.
Credits ET Realty