For the National Monetization Pipeline (NMP) to be successful, the government should give income tax exemption to retail investors to attract them into instruments like Infrastructure Investment Trusts (InvITs), NITI Aayog has recommended.
The Centre’s think tank that runs the NMP, projected to raise around ₹6 lakh crore for the exchequer over four years, has called for bringing such trusts under the ambit of the Insolvency and Bankruptcy Code (IBC) to provide more comfort to investors. also called.
Introducing policy and regulatory changes to enhance monetization instruments such as InvITs and Real Estate Investment Trusts (REITs) and expand its investor base has been identified as a key element for NMP. The government plans to use the InvITs and REITS route to monetize public assets such as highways, gas pipelines, railway tracks and power transmission lines.
The commission said, “More tax-efficient and user-friendly mechanisms such as allowing tax benefits in InvITs as an eligible security to invest under Section 54EC of the Income Tax Act, 1961, for introducing retail participation in instruments important starting points,” the commission has said. In its blueprint, it indicates that further taxation-related changes may be needed along the way.
Section 54EC allows taxpayers to offset long-term capital gains from transactions in fixed assets through investments in bonds issued by certain government-backed infrastructure firms.
Amit Singhania said, “While this will cost the exchequer in the form of loss of revenue, the long-term benefits may outweigh the costs as combining investment in specified bonds with capital gains exemptions had proved successful in the past. ” Partner of Shardul Amarchand Mangaldas & Co. Hindu, adding this will encourage participation of retail investors in InvITs.
While InvIT structures have been used in India since 2014, the Commission has pointed out that such trusts are not considered ‘legal persons’ and cannot be brought under IBC proceedings, thereby preventing lenders from participating. Is.
“Since trusts are not treated as ‘legal persons’ under the existing rules, the IBC rules are not applicable for InvIT loans. Hence, the lenders do not have the existing procedure for project assets,” the commission told NMP. Mentioned in the guidebook.
“While lenders are protected under the Securitization and Reconstruction of Financial Assets and Security Interest Act, 2002 (SARFAESI Act) and Recovery of Debts and Bankruptcy Act, 1993, the provision of recourse under the IBC rules will bring in an additional level of exposure to investors. Rest for,” it is of the opinion.
Ashit Shah, partner at law firm J Sagar Associates, said extending IBC provisions to InvITs will help lenders access faster and more effective debt restructuring and resolution options. “However, infrastructure regulators and SEBI will need to work together for a successful insolvency resolution of an InvIT, which may involve a change in sponsor, investment manager and/or trustee or transfer of an infrastructure asset, ” They said.
Abhishek Goenka, Partner, Eka Advisors, said apart from the inclusion of InvITs under IBC, other amendments may be required, which retail investors may have regarding the safety of their investments in such large underlying assets.
Mr. Goenka also said that a separate clause in the Income Tax Act specifically to provide for capital gains tax relief for investments in eligible InvITs holding NMP assets would be better than extending Section 54EC, which is currently in force by the National Highways Authority of India. Applies to bonds issued by Rural Electrification Corporation, Electricity Finance Corporation and Indian Railway Finance Corporation.
“Given the urgent need to promote retail participation in these formats, the government should provide a higher limit for such tax breaks,” Goenka said.
Under Indian law, a trust is not a separate legal entity and the trustee’s assets are vested in the trustee for the benefit of the trust beneficiaries. Premature winding up or liquidation of a trust is usually subject to the provisions of the trust deed, and in case of regulated trusts, the consent of the regulator may also be required, Mr. Shah explained.
“InvITs either directly acquire a project or acquire shares of the project company. In the latter case, the recourse of IBC will be available where the project company has been lent,” he said, but this will not be applicable when they take direct borrowing at InvIT level for financing acquisition, capital expenditure or promoter contribution. .
Simply put, InvITs are structured so that investors have the opportunity to invest in infrastructure assets with projected cash flows, while asset owners can raise resources upfront against future revenue cash flows from those assets. , which can in turn be deployed into new assets or used to pay off debt.
According to NITI Aayog, ‘streamlining operational modalities, encouraging investor participation and facilitating business efficiency’ can ensure ‘efficient and effective’ results from a monetization drive.