Higher yield expectations, taxation snags halt InvIT launch

Subdued investors' interest and taxation-related anomalies have forced developers to defer their plans to launch Infrastructure Investment Trusts (InvITs), says ICRA.
New issuances of InvITs have dried down after the public issues of two trusts-IRB InvIT and India Grid Trust-at the start of this financial year.
According to ICRA, this has happened as developers have deferred plans and are in wait-and-watch mode which can be attributed to multiple factors with the key ones being subdued investors' interest, and taxation-related anomalies.
ICRA further said the dismal market performance of these InvITs, with both of them trading below their initial issue price, has not escaped investors' attention.

"After the initial experience, investors are bound to expect higher yield for new InvIT issuances. While both these InvITs are targeting an annual distribution yield of 11-12 per cent, it also includes return of capital in addition to the returns in the form of interest/dividend," ICRA vice president and sector head, Corporate Ratings Shubham Jain said.
He said the adjusted dividend yield for investors in some cases can be significantly lower than the distribution yield. "While in certain assets, there can be an increase in distribution yield, complexity and uncertainty involved in cash flow projections along with the limited track record of InvITs may hold back investors from it," Jain added.

Another issue which is adding to the dilemma of the prospective InvITs issuers is the clarity on taxation.

"While a majority of the taxation-related issues for InvITs are resolved, some ambiguities, specifically sections 50CA, and 56(2)(x) of the Income-Tax Act remain, which raise an issue," Jain said.
Due to this, in some cases, there can be double taxation on both the sponsor and the InvIT in case the transfer value is lower than the derived FMV.
"To avoid this, while transactions can happen above the fair market value, this in turn would adversely impact InvIT's yield and consequently investors' interest," he added.