Now, expect InvITs in solar space

Chennai | Updated on February 04, 2021

Experts believe these structures may be a good fit for renewable energy projects

The word ‘InvIT’ occurred many times in Finance Minister Nirmala Sitaraman’s Budget speech in the context of roads and transmission lines. But they may not be restricted to these sectors. Many experts in the renewable energy industry believe that these investment trusts would come in the solar sector too.

InvITs are companies that hold a few regular income-earning assets which can give visible and regular (even if small) returns to investors. These companies are meant to attract funds from investors who expect steady but not fancy returns, such as pension funds.

The Finance Minister said in her speech, the National Highway Authority of India could ‘sponsor’ an InvIT and ‘drop’ a couple of toll-earning road projects into the InvIT. Pension funds would invest in the InvIT, become share or unit holders. Their money would be used to pay NHAI for the road projects.

(In the real-estate industry, InvITs are called ‘Real Estate Investment Trusts’ (REIT). Right now, the IPO of the Brookfield REIT is open for subscription.)

The Minister, in the Budget, said debt financing of InvITs (and REITs) by foreign portfolio investors “will be enabled by making suitable amendments in the relevant legislation”. This, she said, would ease access to finance InvITs. (In May 2019, SEBI has brought out amendments to InvIT regulations, raising the limit of money they could borrow from 49 per cent of the value of assets they hold to 70 per cent, under certain conditions. Now, these structures are likely to be a good fit for renewable energy projects. “We are going to see more of InvITs coming into renewables,” Sanjiv Aggarwal, Partner-Energy, Actis PE, told Business Line (before the Budget). He said that there had been some “leverage restrictions” issues, which have since been sorted out.

InvITs are useful to free-up cash. Once a project is completed and is ready to provide a stream of returns over a long period of time, the developer can drop it into an InvIT, unlocking capital for the next project. These structures are nothing new for solar — in the US, they go by the name ‘YieldCo’. NextEra Energy, TerraForm Power and Atlantica Yield are a few.

In India, Tata Power has said it would set up an InvIT and has applied to SEBI for it. Many other renewable energy companies, such as ACME, had toyed with the idea earlier, but Tata Power’s might be the first InvIT in renewable energy. (India has a few InvITs, but none in renewable energy.)

‘Positive development’

Sunil Jain, a renewable energy expert, who was till recently the Executive Director and CEO of Hero Future Energy, is also optimistic about InvITs; he calls the allowing of FPI debt into InvITs a “very positive development.”

Some, however, believe that it might take a while for solar energy companies to adopt InvITs. Aravind Srivatsan, Tax Leader and Partner at Nangia Andersen LLP, a Delhi-based law firm, notes that since InvITs like long-term predictable returns, asset classes which mirror a low-risk profile with predictable revenue realisation hold the key. “These presuppose clear, long-term PPA. Solar farms are nascent, need to evolve considerably and therefore will take time before they attract investors.”

Srivatsan, however, notes that the government could facilitate solar assets held by PSUs to move into InvITs to “catalyse this asset class.”

Pertinent to point out that NTPC is indeed planning setting up of one.

Published on February 04, 2021

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