Government mulls tweaking rules to promote flow of insurance, pension funds into InvITs

The government is examining a proposal to revamp the investment guidelines of the IRDAI, the EPFO and the PFRDA to promote larger flow of pension and insurance funds into Infrastructure Investment Trusts (InvITs).

The review may enable the Insurance Regulatory and Development Authority of India (IRDAI) to issue fresh guidelines allowing insurance companies to invest in debt securities issued by InvITs, in line with traditional companies.

This could allow IRDAI to revisit the prescribed cap of 5 per cent for insurance companies’ investment in a single InvIT, in line with the limit prescribed by the Securities and Exchange Board of India (SEBI) for mutual funds and its own cap for insurance companies while investing in listed equities.

Similarly, the Pension Fund Regulatory and Development Authority (PFRDA) mandates a minimum credit rating of AA for the sponsor of an InvIT to allow participation of pension funds. As InvITs are independent of their sponsors, the rating threshold could be made applicable only to InvITs and not to the sponsors, a government official said.

InvITs is an asset monetisation model wherein developers monetise their investments in infrastructure projects to help raise funds for new project development.

Leverage norms relaxed

The Indian InvIT market is in the nascent stage and has supported the formation of ten InvITs so far, of which only two are listed. The leverage norms (debt to asset value) for InvITs were recently relaxed to 70 per cent from 49 per cent.

The official said further facilitation and regulatory tweaks would enable InvITs to emerge as a crucial source of financing of public and private infrastructure, while making sure that there are adequate safeguards to check double financing and ever-greening of loans.

Given the long-term nature of the infrastructure projects, long-term patient capital is ideally suited for their funding. However, investment guidelines for patient capital — insurance and pension funds — are not aligned to meet this requirement.

Strict regulatory requirements mandate these funds to invest only in highly safe government and public sector bonds, even at the cost of earning lower returns. Further, while most infrastructure firms are set up as special purpose vehicles (SPVs) and are private limited companies, the current guidelines of insurance firms and pension funds prevent their participation in funding such companies, the official said.

Indian pension funds, including NPS (National Pension System) and EPFO have assets under management (AUM) of over ₹18 lakh crore ($250 billion). Similarly, insurance funds, including LIC, have AUM of nearly ₹37 lakh crore. Thus, collectively, the pension and insurance AUM exceeds ₹55 lakh crore ($760 billion). A large portion of the funds are invested in G-secs and other safe assets.

LIC has been investing in infrastructure created by the Centre and state governments, with the infrastructure AUM for fiscal 2019 at ₹3.84 lakh crore or about 10.5 per cent of the total AUM of ₹36.65 lakh crore.

EPFO, with an AUM of ₹11 lakh crore, is permitted to invest up to 5 per cent in asset-backed securities, units of REITs and InvITs, up to 40 per cent in equities (which include infrastructure equities) and up to 40 per cent in debt securities (which may include infrastructure project debt securities).

InvITs are trusts holding infrastructure assets, such as operational roads and transmission assets, which have long concession periods and stable cash flows.

InvITs are registered with the SEBI and can raise funds by listing on the exchanges and issuing units to investors.

InvITs help developers raise capital from a wider investor base and also help sponsors time the market for stake dilution. These are hybrid instruments regulated by SEBI and are mandated to pay at least 90 per cent of distributable cash flows to investors. Such distributions are to be mandatorily made at least on a half-yearly basis. Because of their pass-through status, InvIT units offer tax-efficient returns, suiting the appetite of long-term institutional investors.