Streamline investment for insurance, pension funds in InvITs: NITI Aayog

A staggered approach should be followed for streamlining of investment guidelines and limits to keep pace with the growth in the InvIT market, it suggested

The NITI Aayog has suggested streamlining limits for investment by insurance and pension funds in infrastructure investment trusts (InvITs) to promote active participation by investors to fund infrastructure (infra) projects.
 
“The long-term nature of infra projects requires active participation from investors looking at a similar return profile from their investments. However, the existing investment guidelines for insurance and pension funds limit the exposure of such funds to InvIT/real estate investment trust (REIT) assets,” the Aayog said in the guidebook of the National Monetisation Pipeline (NMP).
  
The investment limit for insurance funds is currently capped at 3 per cent of fund size of the insurer, and 5 per cent of units issued by a single InvIT/REIT.
  
Pension funds under the Employees' Provident Fund Organisation are also regulated to invest up to a maximum of 5 per cent of the funds in InvIT/REIT. 
 
Mutual funds can invest up to 10 per cent of their assets under management in a single InvIT/REIT.
  
“These need to be streamlined to ensure consistency,” the policy think tank said as the government looks to expand the investor base and scale up instruments to operationalise its Rs 6-trillion asset monetisation pipeline.
 
The Aayog has also pointed out that the Insurance Regulatory and Development Authority of India regulations do not permit investment of insurance funds in unlisted InvITs. 
 
A staggered approach should be followed for streamlining of investment guidelines and limits to keep pace with the growth in the InvIT market, starting with the allocation of insurance and pension funds towards unlisted InvITs, it suggested.
  
With the market maturing, this anomaly should be streamlined and more discretion should be given to the investment committee of boards of insurance and pension funds to avail of the huge opportunity in unlisted InvITs, said Nirmal Gangwal, managing partner of Brescon & Allied Partners LLP.
 
The investment committee should be made accountable, and regulatory restrictions should be limited, said Gangwal.
 
“The government has to encourage long-term investment by pension and insurance funds and wherever there is uncertainty because of the long gestation of a project, it should give some stand-by comfort to improve the credit profile of such a long-term investment,” he added.
 
The policy think tank has also suggested that the institutional backbone for scaling up asset monetisation may be prepared at the level of the relevant ministries. Each ministry must form an empowered working group to identify assets, suggest methods of monetisation, and assist in such transactions.
 
Since investors will need the data on revenue and expenditure of specific assets on the block, public sector agencies must move towards asset-level financial disclosures and earmarking of revenue streams across all assets. This will help in establishing investor comfort, it said.
 
There is also a need to develop a public-private partnership concession framework for various brownfield assets identified under NMP for quicker adoption by public asset owners.
 
The Aayog has also recommended having an effective contract and dispute resolution mechanism for honouring contracts. The provisions should be legally enforceable, so that parties entering into a contract honour their obligations. If they do not honour their contractual obligations, there should be adequate safeguards for other stakeholders, it added.
 
It also made a case for giving tax benefits to initiate retail participation in InvITs, and suggested having the provision of recourse under the Insolvency and Bankruptcy Code (IBC) to give comfort to investors.
 
More tax-efficient mechanisms are needed, such as allowing tax benefits in InvITs as eligible security to invest under Section 54EC of the Income-Tax Act, 1961. This would help in initiating retail participation, it said.
 
According to Section 54EC, capital gains are exempt from taxation if profit made from the sale of long-term capital assets, such as immoveable property, shares or stocks, is invested in long-term specified assets within six months.
 
Since IBC provisions are not applicable to InvITs, the provision of recourse under the bankruptcy law will bring in an added level of comfort to investors, it added.
 

TOSSING AROUND IDEAS

• Overhauling investment limits needed for funding infra projects
• Creating empowered groups to fast-track asset identification and monetisation
• Asset-level financial disclosures and earmarking of revenue streams across all assets
• Developing standard agreements for various brownfield assets across sectors
• Effective contract and dispute resolution mechanism for honouring contracts