Brookfield-RIL InvIT likely to raise more debt to attract investors

With the Budget 2020-21 levying dividend distribution tax (DDT) in the hands of recipients, the Reliance Industries-Brookfield infrastructure investment trust, Tower Infrastructure Trust, is looking at the option of raising more debt from foreign and ultra-high net-worth investors and offer attractive interest to them.

These investors will be able to save on tax by investing via jurisdictions which have lower withholding tax rates on debt instruments. While some tax-treaty countries, such as Singapore, have a withholding tax rate of 15 per cent, there are a few jurisdictions where the withholding tax rate on a debt instrument is as low as 7.5 per cent. Therefore, investments via debt instrument may help save tax, said a source close to the development.

“After the Budget, the trust is looking at all options, and offering more debt with interest is one of those,” said the source. ICICI Securities is the lead manager to the issue.

The change of plan was necessitated to attract investors to the fund, which has been planning to raise Rs 25,000 crore from them as soon as the Securities and Exchange Board of India cleared its draft prospectus. The final prospectus will highlight the change in tax laws.

The Budget had made infrastructure investment trusts (InvITs) and REITs (real estate investment trusts) unattractive for equity investors, thus affecting the plans of these trusts to raise money.

CHANGING STRATEGY

• Brookfield-RIL InvIT looks to raise Rs 25,000 crore
• The Budget makes dividend unattractive for equity investors
• Investors may look at jurisdictions levying lower withholding tax on debt
• Investments via debt instruments, will not offer valuation gains

Tower Infrastructure Trust, set up by Brookfield and RIL, had filed its prospectus just a few days before the Budget was announced. The trust currently holds 51 per cent of the equity shareholding in Reliance Jio’s tower assets and plans to buy the rest from RIL using part of the issue proceeds. The plan is to list the units on stock exchanges.

Apart from repaying bank loans, part of the trust loan of around Rs 13,171 crore will be used by the tower company to prepay and repay, in part or in full, certain borrowings and interest obligations of the tower company towards RIL.

InvITs are akin to mutual funds. They pool money from several investors for putting it in assets (infrastructure projects) which give cash flow over a period of time. 

According to the Budget, dividends will now be directly taxed in the hands of shareholders/unit holders and the company/mutual fund/InvITs would be required to withhold applicable tax on the same — proposed at 10 per cent for residents and 20 per cent for non-residents.

This made prospective investors jittery and not many were attracted towards the units already sold to investors as equity. REITs and InVITs are considered as tax-efficient vehicles as they distribute 90 per cent of profits as dividends to their unit holders. This can be changed by raising funds as debt, rather than equity, though valuation gains will not be available to the investors if they invest in debt instruments.