CRISIL Ltd. (CRISIL) FY22 Earnings Concall Transcript

CRISIL Ltd. (NSE: CRISIL) FY22 Earnings Concall dated Oct. 18, 2022

Corporate Participants:

Nitin Bansal — Associate Director

Akanksha Aggarwal — Manager

Manish Kumar Gupta — Senior Director

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

Pushkar Kulkarni — Managing Director Infrastructure & Sustainable Energies CPPIB India Advisors Private Limited

Harsh Shah — Chief Executive Officer & Whole-Time Director, IndiGrid Investment Managers Limited

Ami Momaya — Director, KKR & Company

Naveen Vaidyanathan — Director

Presentation:

Nitin Bansal — Associate Director

Good afternoon ladies and gentlemen. I’m Nitin Bansal [Phonetic], Associate Director CRISIL Ratings Limited. Welcome all of you to the CRISIL Ratings webinar on InvITs and REITs “The twin cylinders of infra monetization”. Today, the webinar will have a presentation followed by a panel discussion with industry experts and a Q&A session.

Our speaker for today’s webinar is Akanksha Aggarwal, Manager, CRISIL Ratings Limited. We also have with us Manish Gupta, Senior Director, CRISIL Ratings Limited and Naveen Vaidyanathan, Director, CRISIL Ratings Limited, who will join us for a panel discussion and a Q&A session.

Besides, we are very glad to have an esteemed panel of leaders, who have joined us as panelist today. I warmly welcome Mr. Subahoo Chordia, Head Infrastructure Yield Strategy, Edelweiss Financial Services; Mr. Pushkar Kulkarni, Managing Director, Infrastructure & Sustainable Energies CPPIB India Advisors Private Limited; Mr. Harsh Shah, CEO & Whole-Time Director, IndiGrid Investment Managers Limited; and Ms. Ami Momaya, Director KKR & Company. Thank you all panelist for taking their precious time out for the webinar.

I would also highlight — I would also like to highlight that the webinar is being recorded. Now before we get into the presentation, let me just take a couple of minutes to provide you some context behind the theme of this webinar and its key messages.

Infrastructure being the backbone of any economy remains the biggest focus area. And India plans to spend over INR100 lakh crores on infrastructure projects over five year ending fiscal 2025. Now, investment of such scale will need to tap alternative financing ways as long-term equity capital availability through conventional means remains a challenge. And InvITs and REITs, having features between debt and equity have emerged as popular alternatives where institutional and retail investors can also participate to fund infra growth. And, at the same time for the developers, InvITs and REITs provides a platform to monetize the block capital from operational assets. Given this backdrop, our presentation today remains on journey of InvITs and REITs in India so far. Here are some of the key messages which we will cover today.

In India, InvITs and REITs are relatively nascent. But globally, they are a grown investment vehicles for five, six decades. While initially they had faced some hiccups in India, now they have grown at a phenomenal rate of 90% over fiscal 2019 to 2022 and are poised to reach an asset under management of INR5 lakh crore by fiscal ’23. The government’s national monetization plan has also achieved INR18,000 crores of monetization through InvITs and REITs alone in fiscal ’22.

The plan with an overall estimated monetization potential of INR6 lakh crores over the medium-term identifies InvITs and REITs as a key platforms. Moving on, from a regulation perspective, SEBI regulations have been evolving to improve acceptance of InvITs; however the actual assets going through InvIT and REIT route would depend on bringing the developers and investors expectation at the same platform. And InvITs started with the roads and transportation sector in 2018. However over fiscal 2019, 2022, more asset classes are getting added to this platform. However, as we move from passive to more active classes, the risk spectrum is also widening. And lastly, from the credit perspective, so far we have seen the Trust maintaining much lower leverage that typical infra assets, despite regulatory relaxation. Hence, they enjoy highest degree of safety ratings. Now, I’ll hand it over to Akanksha, who will take you through the presentation.

Over to you Akanksha.

Akanksha Aggarwal — Manager

Thank you Nitin. Good afternoon, everyone. Let us begin today’s presentation by seeing the global presence of InvITs and their evolution in India. As we know, an InvIT REIT is a Trust that holds various infra and real-estate assets under it in the form of ASPVs [Phonetic]. The platform provides a win-win solution to all stakeholders involved as well as for the economy in general. For sponsors or project developers, it provides a way to unlock capital for further investment. It allows them to deleverage their balance sheet and gives them access to low-cost and long-term capital.

For investor or lenders, it provides a low-risk investment opportunity with a steady long-term return. It gives them the flexibility of investing in infra assets without actually owning them. Also, it allows investment in a pool of assets leading to risk diversification. For the macro-economy in general, it helps in efficient running of the asset creation cycle as banks as well as developer’s capital is freed up for further investment.

As most of the Trust depend on the bond market, it leads to development of the primary and secondary capital markets. It also enhances liquidity in the market by mobilizing high-quality and long-term debt. Overall, InvIT REITs can be seen as an attractive investment vehicle for infra creation as well as monetization as they exhibit enhanced governance and transparency standards, along with a tax-friendly structure.

If we see the global landscape, InvIT REITs have a long track-record with the first trust being launched in 1960 in the United States. Over the years, they have gained popularity in key developed nations of the world. The U.S. is clearly the leader in the pack here with 234 publicly-listed Trusts as on date with a market cap of around $1.3 trillion. Against this, India, where the concept was introduced only in 2014 have 16 active Trusts currently with a market cap of $17 billion.

We have also shown a comparison of the Trust’s market cap to GDP in these countries. While it is around 6% in the U.S., India is far behind at less than a percent. This shows that there is ample potential to be exploited through the InvIT REIT route in India. Let us now see the growth trajectory of these Trusts, specifically in India.

It was in FY’15 that SEBI first notified InvIT REIT regulations, however it was only in FY’18 that the first two InvITs were launched; one in the road sector and one in power transmission. This was mainly due to two reason. One because it was a new kind of investment vehicle and took some time to build investor confidence, and secondly, along the way, regulations became more conducive.

On the left bottom chart, we see that most of the InvITs are being floated as private listed Trust, which provide them all the benefits of a public InvIT with lower compliance requirements and regulatory overview. With more supportive regulations and increasing investor confidence, the asset under management has had a good growth trajectory and has reached INR4.5 lakh crores under 16 Trusts in fiscal ’22. Amendments in regulations in the past few years have continually tried to smoothen the path for InvIT REITs, some of the major changes are listed here.

For instance, in FY’20 the regulations allowed InvITs to increase the leverage limit to 70% of the AUM from the existing 49%. In FY’22 FPIs and Insurance companies were allowed to subscribe to InvIT issued debt securities. In FY ’23, the Trusts have been allowed to issue commercial papers. The regulator has taken a balanced approach here, in order to make InvITs an attractive proposition for developers, while at the same time protecting investor interest. The major regulation such as the debt gap and the mandatory distribution of 90% cash flows is a common feature seen across economies, particularly in developing countries.

The growth in InvIT REITs has also been propelled by addition of new asset classes the mix. While we started with just two in FY’18, there are now six different asset classes. As of now, Telecom infra accounts for more than 50% of the total AUM. While it is the road sector which accounts for almost 50% of the outstanding InvITs by volumes. Roads have emerged as the most popular asset class, driven by features such as long operational track-record of assets, ready availability of assets with healthy pace of infra creation, predictable cash flows with costs linked to inflation and a strong counterparty in NHAI for HAM projects.

Let us now see the growth potential of these Trusts. As per the union budget of 2020, India needs over INR100 lakh crores over the next five years for infrastructure fit out that can lift its growth to the next level. Between fiscals 2013 and 2019, we have already spent INR57 lakh crores in the infra space. Now that target has almost doubled. That’s an order of demand beyond the wherewithal of traditional modes of financing and will clearly need a more concentrated effort involving innovative modes.

InvIT REITs are investment vehicles with features between debt and equity and can be a key partner in India’s infra growth story. The existing asset classes where InvIT REITs have already happened are roads, power transmission, commercial real estate, gas pipeline, renewable energy and telecom infra. Some of the new asset classes which would come under this platform are hospitals, hotels, railways, metros, airports, etc.

On the next slide, we have assessed the total value of assets under the classes that have already come under the InvIT spectrum. Based on our estimates of the future cash flows of these asset classes, INR18 lakh crores to INR22 lakh crores worth of asset base is present in India and a healthy part of this would come into the InvIT spectrum over the next few years. On the pie chart on the right, we see that renewables sector is the one with maximum potential. Further, gas pipeline and transmission sectors also have strong potential with an asset base of over INR3 lakh crores each.

Further, the Central Government has identified InvITs and REITs as key partners in the national monetization plan. The total monetizable asset base is estimated at INR6 lakh crores over fiscal 2022 to 2025 spread across various asset. As per reports, the government has already sold assets worth INR96,000 crores against the target of INR80,000 crores in FY’22. Of this, INR18,000 crores was routed to the InvIT mode in the transmission and road sector. Thus, we see that there is a strong monetizable asset-base in India and that the pace of monetization through the InvIT REIT route will depend on whether or not developers opt for this mode.

On one-hand, developers may opt for InvITs as it give them an option to deleverage, give access to long-term institutional investors, lead to a more efficient tax structure and help accelerate growth. On the other hand, loss of managerial control, higher valuations available through public listing or PE route as well as higher regulatory restrictions and surveillance in InvIT and REITs may hinder their adoption.

There is a strong pipeline of assets being added to the InvIT REIT space with INR40,000 crores of InvITs already announced and expected to come into play by the end of fiscal ’23, taking the assets under management to INR5 lakh crores. The growth momentum is expected to continue over the medium-term supported by monetization of existing asset classes as well as new asset classes moving into InvIT REITs.

Moving on to the credit risk profile of InvIT REITs. We currently have 16 InvIT REITs in India and another four are yet to be launched. Total AUM of these Trusts is around INR4.5 lakh crores. Currently, all of these Trusts enjoy high credit ratings of AAA. These ratings are on rated bank loans or debt instruments and negating likelihood of timely payment of the obligation under the rated instrument. They do not comment on the potential returns to unitholders. Unitholder returns are subservient to debt. Returns to the unitholder are subject to the risk profile of the underlying asset classes.

An analysis of the debt profile of the five largest InvIT REITs show that the proportion of bank loans in the debt mix has increased with commercial banks gaining confidence in lending to these Trusts. Moreover, the average debt maturity is only at around nine years. The Trust may be exposed to refinancing and interest-rate risks, however these are mitigated by features such as the long remaining life of assets with predictable cash flows, leading to healthy PLCRs and ample refinancing opportunities as well as a healthy cushion on the PSCR.

One of the key aspects which distinguishes an InvIT REIT from the typical infra asset is their low leverage. We have analyzed this for a sample set of six InvIT REITs and compared it to the typical infra asset, which is shown as the red bubble on the chart. On the X-axis, we have DSCR and on the Y-axis we have leverage in the form of debt to AUM. The size of the bubble denotes number of assets.

Here, it comes out very clearly that leverage in most of the InvIT REITs is lower, below 50% whereas for typical infra assets, leverage is mostly around 70%. This in turn helps InvIT REITs have better DSCRs. Another point to note here is that most of the InvIT REITs provide more than five assets, giving them the benefit of diversity and thus supporting the credit profile.

On the right-hand chart, we see that most of the debt to AUMs have remained around 50% despite the leverage norm being revised to 70% for InvITs and despite the Trusts are acquiring more assets to sustain their growth. This could be an outcome of the mandate of a AAA rating. As the InvIT spectrum widens, so does the risk of the underlying asset class, making it more difficult to secure the highest safety credit rating unless the leverage is lower than a standalone asset.

Let us look at the risks in detail. On this slide, we have divided risks in five categories. First one being the earnings risk or demand risk, which covers the stability of revenue. Second is the counterparty risk which is based on the credit profile of the counterparty which would have a bearing on payments. Third is operating risk, which measures the challenges involved in maintaining the asset in a functional stage. Fourth is the regulatory risk, which covers whether the sector has been subject to frequent regulatory changes that have impacted the business visibility or viability. And fifth is the interest-rate risk, which measures the impact of interest-rate variability on the sector.

All these risks have been categorized under three color schemes. A red bubble indicates high degree of risk, yellow means moderate and green means low. For example, power transmission assets have long-term transmission service agreements and availability based status, thereby resulting in stable cash flows and leading to low earnings risk. Whereas for toll roads, toll collection is dependent on economic performance and hence the earning risk becomes moderate.

In renewable projects, the counterparties are a mix of state discoms and SEBI [Phonetic], leading to moderate counter-party risk. Against this, HAM projects, where NHAI is the counterparty or a power transmission asset where the central transmission utility acts as a collection agent under the PoC mechanism, leads to lower counterparty risk in both asset classes.

Another example is on the interest-rate risk. Here, interest rate fluctuations would impact all sectors with the exception of HAM roads where the interest cost is passed-through in tariff. We have arranged the sectors in increasing credit risk from power transmission being the most stable to real-estate being relatively riskier. It has to be noted that all of these infra asset classes are relatively safe with high predictability of cash flows.

This classification is only a relative risk spectrum of these asset classes and not a commentary on the sector risk in absolute terms. As InvIT REITs in India expand across various asset classes, the spectrum of ratings would change from the current AAA rating levels. Further as the risk spectrum broadens, the debt thresholds for the asset classes would also change.

To, conclude, InvITs and REITs have grown at a strong pace thus far and the momentum is expected to continue with a healthy potential across infra asset classes. However the actual assets going to the InvIT REIT route will depend on bringing the developers and investors expectation at the same level. Further, investor education is important to bring in the confidence among retail investors.

So far, we have seen that even with regulatory relaxations, most InvITs are not increasing leverage over 50%, leading to strong DCSRs and credit risk profile, the mandate of a AAA rating maybe keeping the leverage low. As newer asset classes get added, the underlying risk spectrum will broaden and needs to be closely assessed. As we move from more passive to active asset classes, the debt and DSCR thresholds will also accordingly change. We’ll deliberate further on strengths and challenges for InvIT REITs in the next part of the event, which includes a panel discussion with industry leaders.

Thank you everyone. I now hand it over to Mr. Manish Gupta, Senior Director and Mr. Naveen Vaidyanathan, Director at CRISIL Ratings to take it forward.

Manish Kumar Gupta — Senior Director

Sure. Thanks, Akanksha, for a very insightful presentation. Before we move to our next segment, I would like to announce that CRISIL Ratings has a mobile application that is called Ratings Analytica and a portal ratingsanalytica.com, which offers high-quality, timely and actionable insights by combining data, domain expertise, and decades of institutional experience.

We have been receiving several requests from the audience too for the webinar presentations and I would like to inform that even presentation for today’s webinar will be available on the mobile app as well as the portal in the next few days. You may also download the mobile app by scanning the QR code which is currently visible on the screen.

So now, we move to our next section, that is the panel discussion. During the panel discussion, we would also be running a poll to know the participants’ views on the sector. So now, we begin our panel discussion which is also the key highlight of the webinar. As I mentioned earlier, we have quite an imminent panel today and I’m quite proud to introduce them.

As — our first panelist for today is this is Mr. Subahoo Chordia, Subahoo is the Head Infrastructure Yield Strategy at Edelweiss Financial Services. He had a 21 plus years of experience in infrastructure sector across asset management, M&A, advisory, capital markets, project finance. He is also a founding member of Edelweiss Infrastructure Business too. He has been a member of various infrastructure forums and task forces including India-UK Sustainable Finance Working Group, CRA task force on PPP and infrastructure and so on.

A very warm welcome to you Mr. Chordia. Mr. Chordia?

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

Thank you. Hello.

Manish Kumar Gupta — Senior Director

Yeah, thanks. Our second panelist for the days is Mr. Pushkar Kulkarni. Mr. Kulkarni is the Managing Director Infrastructure & Sustainable Energies at CPPIB India Advisors Private Limited. Mr. Pushkar has over two decades of experience in infrastructure covering technology to operations and investing. Before joining CPPIB, Mr. Pushkar served as the Managing Director of Serco India with a Board position. He has led several M&A transactions across his assignments, has also worked on several marquee infrastructure projects as well.

A very warm welcome to you Mr. Kulkarni.

Pushkar Kulkarni — Managing Director Infrastructure & Sustainable Energies CPPIB India Advisors Private Limited

Thanks Manish.

Manish Kumar Gupta — Senior Director

Sure, thanks. Then we have Mr. Harsh Shah. Harsh is the CEO and whole-time Director at IndiGrid Investment Managers Limited. Mr. Shah has extensive experience in infrastructure sectors across bidding, financing, operations, mergers and acquisitions, and regulatory policy. He was instrumental in setting up IndiGrid, India’s first infrastructure investment trust in the power transmission sector and he is also the member of the SEBI Advisory Committee for InvITs and REITs.

A very warm welcome to you, Mr. Shah.

Harsh Shah — Chief Executive Officer & Whole-Time Director, IndiGrid Investment Managers Limited

Thank you. Thank you for having us.

Manish Kumar Gupta — Senior Director

Thanks. Thanks. Our fourth panelist is Ms. Ami Momaya. She is the Director, KKR & Company. Ms. Momaya joined KKR in 2022 and is a member of the Asia Pacific Infrastructure Team at KKR. She began her career at Morgan Stanley where she spend some 17 years across the India and New York offices and was instrumental in building their India infrastructure businesses as well. She led transactions across transportation, logistics and renewable energy, and presently is responsible for infrastructure investment KKR in India.

A very warm welcome to you Ms. Momaya.

Ami Momaya — Director, KKR & Company

Thanks you Manish.

Manish Kumar Gupta — Senior Director

So thank you all panelist for taking your precious time out for the webinar. So, let’s start with the panel discussion. And my first question is to Mr. Subahoo. I think as we saw in the presentation, I think InvITs and REITs have come a long way over the last few years. So, how would you describe the evolution of the regulatory landscape in particular and what more do you believe can be done to increase the depth and accelerate adoption here.

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

Yeah. No, I think — thanks Manish for the question and it was a good presentation about how InvITs and REIT has evolved in India. And typically if you look at it, I think the time when InvITs and REIT has evolved from 2017 till date, I think we have gone through many phases in India. I think, including the financial I think crisis which happened in 2018, COVID which happened and what I think InvITs and REITs have shown is the resilience against those events as compared to the volatility which happens otherwise in the market.

So, I think the regulator has done a good job to start with the product which is little more regulated, putting up some kind of framework around it. And as it is moving towards more being evolving and this is how equity market evolve. I think, what could be expected out of it is more relaxation on regulations as how the developed market has evolved.

So, as the product matures as more and more participation happens and this is how I think the equity market has evolved, this is how the — in the world, the yield market has evolved. I think we may expect some regulatory relaxation. I think SEBI is already doing — slowly to move in that direction. But what is important, and I think which is highlighted in your presentation is an effort to be made to educate the investor around how to evaluate an InvITs and REITs. And I think there was a slide which talks about what is the kind of risk-return profile based on the underlying assets.

And currently, the ratings of the InvITs are actually the debt rating, right. These are not InvIT ratings, so these are debt that are issued by the InvITs. And therefore a good education in terms of investor to understand the risk profile of underlying assets and hence evaluate in terms of what should be the risk-adjusted return they should look at, I think is still going to go. From a fact, I think which you presented that there are a lot more private InvIT than public and I think more and more public participation happens, it will also build institutional coverage.

Currently I think most of the InvITs and REITs are not covered by institutional houses. They are — there is not enough coverage on those units and I think what will help is an educational framework which the stakeholders can do and also over a period of time, build institutional coverage so that investor can be well-educated how to evaluate between let’s say a transmission InvIT versus a REIT. I’m just going in the two extreme of your slide.

And I think that will be an important one to build a depth with the investors in that, just like an equity story in the market we have various stocks but you can’t compare each stock. So while it’s a product but it has a range of risk-adjusted return and that is how it needs to be evaluated and it needs to be educated.

So I think our regulatory framework is evolving. I expect that it should evolve further, it should get relaxed further. But I think what needs is more to build a depth of education with the investors who are going to be looking at investing in InvITs and REITs.

Manish Kumar Gupta — Senior Director

Sure. Thanks, Subahoo. I think, certainly investor education is important in risk-adjusted returns, how to evaluate different asset classes. All are very-very important points that you made as we are seeing currently it’s in the market making Phase. I mean, if I look at it at the whole InvIT process. But picking on your point on relaxations and developed market experienced, let me now move to Ms. Ami Momaya.

Ms. Momaya, I mean, InvITs and REITs have been very popular globally as well and it has been there for quite some time as one of our slides also showed. Given your experience, what are the learnings that can be borrowed to increase the debt in India as well?

Ami Momaya — Director, KKR & Company

Sure. Thank you, Manish. As Subahoo said, right, I think regulators in India have been fairly nimble in improving the product through various interim regulatory modifications. India is a different market just in terms of development, in terms of operational assets, in terms of where we are in the whole lifecycle of getting to a product that is built the way it’s built today. So, in my mind, I think the marketability and liquidity of a unit is paramount for the long-term success as a product and also to the price discovery of that unit as well.

So, on the regulatory side, of course there is more visibility in terms of cash flow. But from an investor point of view, this is still an equity product. So, I think the first thing that the regulators need to think about, is this to be treated as an equity product? Also the regulation around it should be at par with any other equity product. Like for example, a long-term capital gains for InvIT is still 36 months, but for an equity security, it’s 12 months. So one that regulation, one it has to be equity, it needs to be brought to par in terms of treating it as equity.

And second, in terms of just the debt and distribution. I think adding REITs and InvITs to the indices will be immensely helpful in improving the liquidity of this asset class. If you also look at a U.S. and a Singapore, there is no concept of a sponsor. So, as we evolve, can we also consider an InvIT without a sponsor with a professional management and that’s probably — you know probably a few cycles down but it’s also a thought.

And the other interesting fact is that in some foreign markets if there are two separate vehicles and the managers of those vehicles merged the InvITs are deemed merged. Today, we do not have a new regulation which enables the mergers of InvITs in the country. So I think that would also be a good step forward from the industry perspective.

Manish Kumar Gupta — Senior Director

Sure. Thanks Ami and I think interesting concept, I mean with respect to sponsors. I think this is one area where we also have been debating internally quite a lot about the role and responsibilities of the sponsor and how does that impact the quality for the index. So thanks a lot, Ami, for your perspectives here. Let me now Pushkar for my next question and the question is like, how are you seeing the investor confidence in the sector evolve over last two, three years both from unitholder’s perspective as well as the lender perspective over here.

Pushkar Kulkarni — Managing Director Infrastructure & Sustainable Energies CPPIB India Advisors Private Limited

Yeah. Thanks, Manish and I think a great sort of precursor from Subahoo and Ami to how the whole product has evolved. Look, I think and I’ll just start from the event of yesterday which kind of showcases the investor confidence and there was the bond issuance by the National Highway Authority sponsored InvIT, roads InvIT right, which got VX subscription on the NCDs on a 25-year paper in a rising interest-rate scenario on day one, right, and they literally had to sort of close the issue which was supposed to run for 10 days.

So I think things have come a long way and investors both retail and H&I and institutional investors are more and more getting comfort around using InvITs as a route for investment into infrastructure asset class or if you want to generalize that more into a yielding asset class. I think as we go through equity market rehash or a down-cycle or a bear run whatever you might want to call it, liquidity yields will become more and more important and InvITs as an asset class will, in that sense, gain more importance.

So, if I look at all our peers as pension funds, all of them today have some or the other investment in InvIT. And similar is the case with most of the family offices from India as well. So I think there is tremendous amount of you know sort of momentum that is built on this — on the confidence. And it really is the responsibility of all of us who are managing InvITs to actually retain that confidence, right.

As SEBI loosens the structure, the regulatory structure around InvITs, it is important that the managers and the investors actually do not take any actions that will be counterproductive, because I think that will set us back a lot. And we’ve seen that. You know 10 years back we had so much investments coming into the infrastructure sector in India especially on the road side, on power plant side and a few, let’s say wrong decisions led to investor confidence getting eroded.

So I think this is a journey. We need to handle it carefully. We need to you know keep moving forward step by step and the confidence should get retained. I fully subscribe that InvITs must have more liquidity and to that end allowing free conversion from a private listed to a public listed, removing those barriers frankly of X number of investors or Y number of investors, a connection to the sponsor compulsory, the sponsor having absolutely draconian regulations that if something goes wrong they can be barred from equity markets for a period of time and so on.

So I think all of these things have to move away and these InvITs have to becoming — have to become a self-governing self-sufficient vehicle. And that, I think, will improve the participation more and more.

Manish Kumar Gupta — Senior Director

Sure. Thanks Pushkar. And I think, it was heartening to hear that the momentum is building up and of course there is a need to tread cautiously and I believe that the regulator is also cautious about that. So while the regulations have been tied to begin with, they have been relaxed and possibly things can be improved better as well. But yeah, the key points you’ve made was the InvIT becoming or the Trust becoming self-governing structures and I think that’s certainly going to boost investor confidence.

So, let me move now to Harsh and be more specific around the risk-return expectations over here. And this was a question that we also received beforehand from our audience as well. So the question is, what is the risk-return expectations from a unitholder perspective of an InvIT or REIT and how do you see the actual returns of InvITs REITs in this light?

Harsh Shah — Chief Executive Officer & Whole-Time Director, IndiGrid Investment Managers Limited

Thanks Manish. I think — and I was just looking at the poll also in terms of percentage return, I would suggest to go back to what Subahoo said. I think one needs to understand the underlying business to really set the expectations of returns and that’s how, I would look at risk and return and then as we’ve seen for businesses which are relatively non GDP linked, non-variable like annuity roads or transmission etc., they have relatively lesser risk and therefore lesser return expected and lesser requirement of growth to meet the overall returns, whereas if it is a toll road, then accordingly variability and linked GDP is more and therefore I wouldn’t call it riskier, but then return expectation would go up because of that additional risk that someone is taking.

And similarly. I mean once there are variety of sector come into play, the nuances are going to increase it, right, if you have a port and if you have airport and school so on and so forth. But I think the simple way to look at it is like any other investment there is a base return which one would expect from an operating assets.

There is a growth that one would expect from — even though it is an operating asset of some kind and the proportion of both of these might be different in — depending on the asset class that we have at hand. Now, the same thing in REIT for example pans out completely differently, right, and REITs trade at a lesser in G-SEC yield because the expectation of investors is that the REITs will result into a growth of vendors and therefore growth of value. And therefore it’s relatively let’s say higher volatility returns and higher risk because it’s linked to real estate and growth, but over a longer period of time people are comfortable with that growth and therefore the yield seem to be lower than G-SEC as well.

So it is asset-specific, business-specific. If you look at the returns that investors have made in pretty much all InvITs or REITs invested since IPO, barring [Indecipherable], they’ve been phenomenally good, right. And that’s because there is a base level of return which is expected out of operating asset and market appreciated eventually the nature of literally lesser risk for these businesses and that resulted into, I would say, appreciation plus distribution and the returns.

So if you look at it, all the InvITs and REITs since listing, all of them have performed very well in comparison to the same type of assets being owned in equity indices or companies, right. So — and that’s because it’s inherent in nature that you are giving distributions around a regular basis.

Manish Kumar Gupta — Senior Director

Alright. Thanks Harsh. I think that was an interesting and very important perspective from investors who are looking to put their money into these vehicles. Let me move to my next set of questions and this one is on amenability of other sectors.

I think one of our slides spoke about roads where I think — that is one of the sector which is found most favor and good number of InvITs are there, over there. But there are other as well. So the question is to Mr. Subahoo. So which are the other sector you see which are amenable to InvITs and REITs in India and how do you see the pace of adoption should — of these new sectors?

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

Yeah. So, see, if you look at the global scenario of the asset which has gone into either a REIT or it’s called as yieldcos U.S. or a master limited partnership, right. Any cash-flow generating asset which can give long-term predictability can go into these structures. Now, as Harsh said, I think what is important is to analyze what is the risk-return levers, right. So there could be some asset class which will give you a higher growth and a lower yield and the investor should value it based on total return, right.

So what is my yield and what is my appreciation which is going to happen which could be inherent in an asset class or in the underlying asset, it could be toll road or a commercial real estate or could be with the growth of addition of assets into that InvIT or REIT, right. So there is a two element of growth or there could be one element of growth, right. So if you look at even in U.S., the yield course, the range at which the yield, they trade at, it is a spread of about 200 to 300 bps.

So, not that every yieldco will trade at a same yield. And the factor will be determined by what is the yield and what is the growth. And I think India is evolving where the growth element is getting understood. There could be certain investor who may prefer looking at Hybrid Annuity Model of or a toll road because it gives you a hedge against inflation or interest rate.

There could be certain set of investors who would like to have more annuity like cash flows, just like transmission. And if you look at it, I think at an investor level it is always good to build a nice portfolio. You will have some portfolio which you will invest into more annuity-like cash flows from portfolio you will invest into which has certain elements of growth and linked to GDP or linked to interest rates and that is how a portfolio should get constructed because over a long-run that will create a much more stable kind of returns or total returns because no one can predict how interest rates are going to move.

We are currently seeing interest rate moving up. You don’t know what’s going to happen after two, three, four year down the line. You don’t know how inflation is moving. So, over a long run, it makes a lot of sense for investors to evaluate and allocate their capital between various asset class some which have a high element of growth linked to GDP, linked to inflation and some which are more annuity-like, right. That’s how our portfolio get constructed. It is same like when an investor looks at an equity market, will invest into defensive stocks which will give maybe a certain set of return large-cap but will also invest into some high-growth stock, right, and that is how I think an InvIT and REIT portfolio should be built by an investor at their level.

Manish Kumar Gupta — Senior Director

Good. Thanks Subahoo. I think this is a very interesting way of putting it across the growth versus yield. I think that will be the key in making the portfolios. And you also spoke about hybrid, I think, more in the context of hybrid annuity our toll. I mean both may have a different profiles.

So let me now move to Ami. So Ami, this is a question related to the developer’s interests and we have seen some developers consider InvIT REITs but they have finally not gone through especially in the sectors like-renewables. We have one InvIT right now there. What are some of the key reasons you see why developers may not see this as an attractive vehicle and how do you see that relative opportunities across other asset classes as well?

Ami Momaya — Director, KKR & Company

Sure, Manish. So you’re right, I think we are the only standing example of a renewable InvIT.

Manish Kumar Gupta — Senior Director

Yes.

Ami Momaya — Director, KKR & Company

So, I mean, initially, to be honest, I think there was a fair amount of debate, right, around the annuity nature of the business, right, which is not necessarily inflation linked. You also have degradation of the asset on one side, you have declining EBITDA, then you have the quality of the counterparty, right. So a lot of — a lot of considerations, right. So the question was, does this make a good underlying asset class?

And the way we thought about it is, yes, because it can be solved through asset selection, right, which also means that upfront your yield looks better, unlike in a toll road where — because you have inflation protection, the yields, the curve looks a little different, which is all fine because both roads and renewables have a certain underlying concession agreement or a PPA and the cash-flows are contracted.

Today, when you look at the renewables market in the country for example, you have some single assets which are operational and available for trades and then you have some large scale platforms that are looking for growth whereas there is a certain operational asset base but the pipeline is probably much larger than the operational asset base. InvITs as a product do not entertain under-construction projects to be placed inside InvITs because the whole reason for the InvIT coming up as an asset class was to provide a slightly more secure — secure asset class, which had visibility into yield, right.

So, when you look at this from a developer perspective today the developer has two options; one is to either sell his assets, recover the cash and then redeploy the cash or actually just raise capital at the operational level within a company structure and the entity. And investors are willing to pay significant premiums in today’s market for that growth pipeline. So, if I were a developer, the arbitrage is between actually realizing real cash for my investments today or looking at building this pipeline, right, getting my platform from say a 1 gigawatt to 5 gigawatt and then eventually continuing the company structure of flipping it into an InvIT.

But the reality is, for an InvIT structure, cash is gained, right. There is no concept of getting lost in you know a 10 times multiple versus a 15 times multiple. The range of outcomes in an InvIT typically is not that broad. So I’m sure that’s exactly how a developer thinks, right. Am I leaving any money on the table, because there is sometimes a disconnect between the value of the pipeline, right? And InvITs cannot house a pipeline today.

So I believe purely from that point of view, right, on a valuation basis, it’s just two separate products, two separate thought processes, but I do think that over a period of time, right, some of these assets which are now being developed will get flipped into InvITs.

So that is the only renewables example, but I would think any asset class like Subahoo mentioned, which has predictability of the cash flow, it could be ports, it could be railways, anything that has a strong underlying contract with a solid counterparty is a great candidate for an InvIT.

Manish Kumar Gupta — Senior Director

Sure Ami. I think — Thanks a lot. I think this was very interesting perspective on this aspect. Let me now move to Mr. Kulkarni and this question is related to multiple asset classes, I think. We are talking about hybrid InvITs and this is, again, a question that came in from the audience. So the question states, what is the future of hybrid InvITs in India? We have not seen much investor interest towards hybrid InvITs, which may have multi-sector infra assets, for example roads renewables, transmission. So how do you see InvIT REITs with multi-asset classes evolve in India?

Pushkar Kulkarni — Managing Director Infrastructure & Sustainable Energies CPPIB India Advisors Private Limited

Thanks Manish. And, well look, I think there are — just to add to what Ami was saying on the reason why renewables InvIT hasn’t taken off, I would generalize it and say, you know apart from roads and transmission, really there are one-off specific examples in telecom or in pipeline etc. but really, if you see from just numbers these are the InvITs that have taken up and I think there is a reason why you know investors are more preferring this route to take exposure to the sectors especially institutional investors. And that is that you know investors are very shy of taking greenfield risks in roads as well as in transmission.

And that has led to developers wanting to you know getting capital by actually churning their assets into an InvIT. Now if you look at the renewable sector, actually that’s not the case. There is so much money chasing greenfield development that developers probably don’t feel the need to monetize their assets as well as there is a lot of M&A activity going on, on a portfolio or a single-asset basis.

So, I think that is one aspect to consider. The second aspect to consider is that is there a strong underlying concession, and again to Ami’s point on predictable cash flows, that is governing that particular asset class and that can actually lead to they being amenable to InvIT. And I’m sure things like towers, telecom towers, fiber or pipelines as and when their underlying concession agreements become stronger and each individual asset is not like a billion dollar asset but there are multiple assets that can be put in, which reduces concentration risk.

Existing InvITs, let’s say, likes of IndiGrid and IndiGrid is already doing something on the renewable side away from their transmission business will actually get into different asset classes right. But I think it just need a little more time and a little more availability of assets in these other classes. I think one very good example is probably railways and as and when railways is able to monetize bits and pieces of their assets into different SPVs, they will be able to monetize them pretty easily using the InvIT route.

And I think that is another important consideration. Today, a lot of these assets which are owned by the government sit on the balance sheet of the government rather than — or the underlying PSU rather than actually in separate SPVs and unless they are in separate SPVs it becomes hard to trade them and put them under an InvIT structure. So I think there are a few of these things that need to move to actually get to that stage I’m sure we will get there over the next few years.

Manish Kumar Gupta — Senior Director

Sure. Sure. Thanks for that optimism on this. And yes, I think better structures and stronger concession agreements and availability of assets in a right form and manner to move into the InvIT structure. So I think that will be the key.

So, let me now move to Harsh. And Harsh this is related to — this question is related to the structure of the InvITs. We’ve been started with some private unlisted InvIT, private listed, public InvITs etc. So, a lot of these InvIT structures have been talked about so — and off-late we are seeing that most of the InvITs are taking up private listed route. So, how are you seeing the pros and cons of each of these routes for the developers or the sponsors in this space?

Harsh Shah — Chief Executive Officer & Whole-Time Director, IndiGrid Investment Managers Limited

Sure. So I think the latest recognitions have one which prevents unlisted InvIT. So, pretty much there are two routes left now for developers or investors. One is a publicly-listed, other is private listed. And I think the big difference between the two is private listed needs to have minimum five and maximum I think thousands investors, whereas public is more.

And private InvITs have more flexibility of doing under-construction projects versus publically listed InvIT. And if you look at these two big differences, they are primarily provided — primarily created for providing flexibility to developers and investors to invest in different kinds of businesses, right.

So, certain businesses may have under-construction or inherent under-construction risk or plans of under-construction assets. And therefore may have to follow a private route and still obtain the same benefits of governance tax and other impacts by following an InvIT. So at the end of the day, the goal is to attract more capital. And by providing these flexibilities what SEBI and ministry has done is to enable both kind of business InvIT platforms.

Public, on the other hand, requires much larger disclosures, stringent guidelines around how much under construction can be done. And therefore there are only limited businesses which will get into that. So, it’s almost like a normal parlance if you were to use, it’s like difference between private equity and public equity, right, a business which is more mature, more stable, longer track-record will probably suite public equity better versus a business which is little bit riskier and before the curve might choose private-equity; not exactly in that manner but pretty much the same construct applies over here as well.

And I think it’s a good sign because it enables more flexibility, more capital to come and own both type of assets. So — and I think that trend will continue. Eventually I believe, as Pushkar also mentioned, eventually as the businesses grow, liquidity becomes an imperative and more operating assets become part of the mix, people will see merit in converting private listed to public at some point in time. And as the market evolves, we’ll see both flourishing well.

Manish Kumar Gupta — Senior Director

Got it. Thanks Harsh. I think that was a useful perspective. With that, let me hand it over to my colleague Naveen Vaidyanathan to take forward the proceedings of the panel discussion. Yeah Naveen, please.

Naveen Vaidyanathan — Director

Yeah, thanks Manish. Thank you. I’ll start this round with Mr. Subahoo and sir this is on regulation. We’ve seen regulations ease in terms of relaxing the leverage thresholds but while stipulating a AAA rating. So somewhere do you think this is somewhere hampering the growth and the depth of the sector?

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

See, I’ll put it like this that, again, it is about and I think some of the panel members have touched this point. It’s about the stage of evaluation of a product, right. So, while there are certain countries where the leverage cap is more driven by the policies which the InvIT decides, right, and the disclosure they makes and it’s not regulatory.

I think what regulators in India has gone with is a little more cautious approach, trying to control their leverage, putting out certain restriction around it and I think as the product evolves and the expectation of course is, as it evolves and as the product gets more matured and as I think Pushkar said, it is an onus of lot of us who are either having an InvIT or the investors who are investing into the InvIT to ensure that as the regulation get eased out over a period of time, we still follow certain discipline and financial discipline.

And I think that will be a key and we have seen some of the countries where these leverage gaps were not there impacting in the initial phase, right. So, if I take an example of yieldcos, what happened out there during the initial phase when yieldcos first got listed in 2014 and then later I think there are certain or — [Technical Issues] which went for an over leverage, and I think it went into a trouble. So I think it is good that there is a certain framework being put in by the regulator. But I think the expectation is that as it evolves over a period of long run, that should get relaxed. It will, of course — if the leverage goes on certain kind of asset class higher, the ratings may come down from AAA. But that is how the pricing of those in which will also start. Right? And I think that is basically coming back to the point of risk return. So it should evolve. But I think it is — we are in a very nascent stage right now. We have only 16 REITs and InvITs. I think the oldest one in 2017 was most of them are much younger. And it is better that we just wait for some period of time on how it evolves as the regulatory maturity happen, as more public in what happens, as more education happens. And then I think slowly the relaxation should come in. That’s my view.

Naveen Vaidyanathan — Director

Fair point sir. I think clearly, some bit of caution is definitely warranted, given where the industry is. My next question is to Mr. Harsh Shah. Sir this is again on the regulation aspect of it. Currently, there is a limit to what extent insurance and pension funds can actually invest in both InvITs, REITs. So do you see this as a constraining factor currently?

Harsh Shah — Chief Executive Officer & Whole-Time Director, IndiGrid Investment Managers Limited

I think more than the limit on the pension fund side, the bigger concern is that EPFO is not enabled, which controls pretty much 95 — 90% of the market. So they’re still not been enabled. And that’s something which we’re working requesting Ministry of Finance to talk to Ministry of Labor and enable. So percentage is not an issue today. It’s a matter of enablement, which has not happened on pension funds. On insurance — to be honest, the limits are fairly placed and I don’t think insurance companies are breaching or lot of the insurance companies have breached till now. But the only downside was that they breached the limits with debt as well, which can artificially reduce the limits. So a higher limit would certainly help because I will be integrating with the regulators when the question is the other normal. People reach the limit and then we’ll increase, whereas the other people would reach the limit if the limit is not there. So it’s a chicken and egg.

So certainly the higher limit would be helpful too. And quite a participation. See the limit right now is very large if you take large insurance, like in LIC and another. But then they are not the marginal or new buyers of InvITs and REITs right now. And the smaller guys have a small analogy. So it’s important to increase the percentage over there for sure.

Naveen Vaidyanathan — Director

Sure, sure. Thanks for that Harsh. I’ll move on to Mr. Pushkar. And this is on the return sustainability. Clearly we have seen InvITs outperform — InvITs and REITs outperform so far. I have a bit loss. Some of it may also be due to front loading the distributions and obviously adding newer assets and maybe refinancing some debt as well. So do you see a risk to the strategy and are the current level of return sustainable?

Pushkar Kulkarni — Managing Director Infrastructure & Sustainable Energies CPPIB India Advisors Private Limited

The think returns itself is has to be elaborated, right? Are you talking about the near term year-on-year yield or you’re talking about an IRR for the life of the instrument? I think investor education in this aspect is very crucial. And I think to all the points made by my co panelists, I think that aspect needs to get accelerated. Otherwise, we might see a sudden sort of loss in investor confidence. However, given where we are in the macro economic cycle, the fact is that interest rates are going to go up. Equity expectation on returns is also going up, which means that existing InvITs will get traded low — will get traded lower. And that’s just a cycle. But if you look at this over the life of the InvIT, then probably it doesn’t really matter. But yes, to your specific question, returns in the near term are going to be under pressure. And that’s just too across all asset classes.

Naveen Vaidyanathan — Director

Sure. Thanks for that perspective Pushkar. We would like to continue this interesting discussion. But given the paucity of time, we will now move to the question-and-answer session. But before we move on to the next round, I would like to inform that a feedback poll will shortly be visible on your screens. Request you to share your feedback by selecting the appropriate options. The poll will be live for about 30 seconds.

Questions and Answers:

Naveen Vaidyanathan — Director

Ladies and gentlemen, will now begin the question-and-answer session. You will be able to see a Q&A chat box at the bottom of your screen. If you have a question, please type your question there along with your company name and await your turn. Participants are requested to refrain from asking company specific questions.

While the question queue assembles, let me start with some of the questions that we received beforehand from the audience. And I’ll start with Ms. Ami here. Amit InvITs, REITs have benefited so far from the low interest rates. As Pushkar was also highlighting as it helped have higher capitalization rates for underlying assets and also more attractive for investors from a yield perspective. With interest rates now rising, how do you see the impact on inventory demand itself?

Ami Momaya — Director, KKR & Company

So Naveen, InvITs house long term assets and the world goes through cycles, right? I mean, on this panel itself, you know, people must have seen these three, four cycles. And like Krishna said, the InvIT unit price adjust for these interest rates that move up and down. So I don’t think we should see this any different from an infrastructure company or for any company that has leveraged for that matter, right? In fact, since there is, I think a cap on leverage, it’s probably safer than some other assets out there that have a lot more leverage. And when you look at InvITs and you look at investment managers, I think there is a lot of work that happens with respect to how you actually take on debt, right? Do you take on fixed rate debt, do you take on floating rate debt? Right? So that annuity business, you’ll probably see some InvITs that are actually on a fixed rate debt profile for the next six, seven years. Are they going to be impacted short term? The answer is probably not. Right?

Whereas on a toll road you may see more floating rate debt, right? But you also have an inflation protection, the revenue line. So I do think there’s a little bit of arbitrage sitting there, there are investment managers whose job is literally to optimize this asset class. And all of them are doing a great job. So I do think there will be some impact on price, but not necessarily, because it just depends on how the InvIT is structured. But I do think, in all the scales irrespective, because there’s like regulation around leverage, InvITs will still come out as winners out of this interest rate cycle as well.

Naveen Vaidyanathan — Director

Sure Ami. Thanks for that answer. My next question is to Mr. Subahoo, and this is on the government monetization plans. Clearly, the government has made some progress through the monetization of assets through the InvIT route, both through the PGCIL as well as NHAI. But beyond roads and transmission, government also has an aggressive monetization pipeline, across sectors like gas pipelines and railways as well. How do you see the opportunity for InvITs, REITs from this?

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

Yeah. I just answered that question. But I will also just add a point I think what Ami was mentioning. I think, if you look at yielding product and this asset class globally, on the point you mentioned, I think the beta of this is lower than equity. And therefore, if you map out and you compare S&P 500 versus an yieldco [Phonetic] or a REIT in U.S., right, you will see the performance during these high inflation and high interest in two gene is relatively better for those yieldcos. Right? In fact, it is a good data point that you will be surprised that REITs actually outperform during high inflation to the S&P 500. And during moderate inflation also it outperforms, right, on the relative return basis. It’s a very interesting data point of how to look at the relative comparison and that is because of the low beta of these kinds of yielding assets. But now, I think coming to your point on asset monetization, so I think it’s a good step. What I think government is doing under the national

Monetization program is looking at the infrastructure assets which are sitting with the government or government entities, both at the center and state level. I think center has started. We are expecting state to follow. And this is a program which is broadly or in a similar line to a successful program which was done by Australia, right? And I think that is a good welcome step, because not only it will add to the pipeline. I think Pushkar talked about having a pipeline of asset. So it will not only add to the pipeline of those assets, and therefore make the market little more bigger and grow the market, but also will add diversification of the asset class.

Again, I think referring to Pushkar talk about railways, so in railways, you don’t have any asset with private sector. You currently have it only with the government. So if that is an asset class, we can add it through an InvIT route that will be also welcome asset class, because it’s a different asset class and which — therefore, it will also bring diversification, more kinds of assets and therefore add to the pool. Saying that, while I think the program currently talks about a lot on various kind of asset class, what we have currently seen is only monetization in highways and transmission. And so far, we are not seeing any visible monetization, which is happening on the other asset class, which are part of the national monetary program.

So while the program has been built very well, I think we are yet to see the execution of those — that program on ground, whether it is railways, whether it is pipeline, whether it is ports, government of the terminal monetization and things like that. And we’ll have to wait and watch how that unfolds and how that get implemented. Currently, the only two asset class with government has been able to monetize out of the initial monetization program has been highways and transmission.

Naveen Vaidyanathan — Director

Right. Thanks a lot. So that was very insightful. So my next question is to Harsh Shah. And this was on the developer linkages, with something which Ami and Pushkar also alluded to. In India, we’ve largely seen developers offloading their assets to InvITs and there’s generally a pipeline of further assets with ROFO as well. Do you see this trend changing with more independent InvITs dealing from the sponsor getting floated?

Harsh Shah — Chief Executive Officer & Whole-Time Director, IndiGrid Investment Managers Limited

I think it will — the — what we’ve seen is first five years of InvITs and REITs where — as the regulations are structured, InvITs, REITs are started by developer themselves, right? And the next phase of growth in capital raising, more professional — professionally or financially investor owned in which the people are transforming into that. And if you were to look at next five, 10 years where the new InvITs will remain continually, I would suggest to be started by developers because there is the critical mass of assets that remains with some people. But the larger ones which have consolidated larger assets, I think would grow even without ROFO, ROFO kinds of proposals and develop their own ways of growing assets, whether it’s development or it’s different kinds of frameworks that people work under or participating national monetization pipeline by bidding for government assets.

So there is — so I think the newer assets are better to be started with a critical mass by the developers. And one mature larger InvITs and REITs would eventually migrate into a variety of platforms and not just dependent on one set of ROFO assets. But if you look at globally, even the most developed market for InvITs and REITs, a handful of InvITs and REITs, but they are large. And I think that’s the trend that we’ll see happening eventually. It’s not that today 16 InvITs and REITs should become 20 tomorrow. Probably they will grow in number. But more than the numbers, the groups will happen in size, because there is an advantage of size in terms of cost, in terms of liquidity, competitiveness, all of it. So eventually, instead of focusing on — rather my presumption is they wouldn’t be 150 InvITs and REITs, but 16 might become 50. But in terms of overall AUM size, that might become more than three times, that proportionately. So that’s the kind of growth that we’ll talk about and which would require independent platforms acquiring independent assets.

Naveen Vaidyanathan — Director

Sure, sure. I have a question from the live audience. And maybe I’ll request Ami to take this up. Banks are allowed to participate in listed debt issued by InvITs, but not allowed to participate in REIT issued debt papers, whereas the risk factor in InvITs could even be higher that — than that of REITs. So why is this so? And could regulators look at resolving this?

Ami Momaya — Director, KKR & Company

Okay. I’m not a REIT expert to be honest. InvITs is more up the alley for me, but anyone else on the panel who is a REIT expert.

Harsh Shah — Chief Executive Officer & Whole-Time Director, IndiGrid Investment Managers Limited

I will take that. See the — let’s not call whether InvIT or REIT which is less risky or more risky. I think as all the panelists spoke about what needs to understand the business, there could be a REIT which is safer than an InvIT and there could be an InvIT which is safer than a REIT. One needs to understand that and rating is an important criteria to understand. But even beyond ratings, there are other factors one needs to evaluate. So I don’t think a generalization could help. The RBI has not enabled real estate or other REITs, bank lending to REITs or whatever the reasons. But I think the — one of the reasons why they are not allowed is that real estate is a sector as classified as one sector. And even though they’re part of REITs and CIPA, from a regulator perspective, it’s just a real estate. So if — like an InvIT, like an infrastructure, there are sub sectors created if — you know, there are sub sectors created within realistic, probably RBI would must have courage to approve it. So it’s just a perception of being real estate, exposure to banks, which are [Technical Issues] and that’s why it’s not enabled. But I would hazard a guess whether it’s safe or riskier versus InvIT, because every business will be related as such.

Naveen Vaidyanathan — Director

Right. That’s fair Harsh. I’ll probably cover told — take two last questions. And this is to Mr. Subahoo. Sir we’ve seen ESG growing importance last few years with both investors and issuers. How do you see in InvITs, REITs benefiting from the ESG story?

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

So — yea. So, I think — during this panel discussion, I think we did spoke about not too much of renewable InvITs, right, and renewable is — naturally has an ESG angle to it, because it is environmentally friendly and things like that, apart from I think now transmission which also evacuate, the new transmission asset, which will also be evacuating renewable power. But it has that natural factor of ESG, while there is also a factor of ESG in other sectors. But I think renewable is the highest.

Saying that, I think — while — if you look at globally and look at yield course in U.S., there are a lot many which are diversified and I think you did talked about hybrid in which there are lot many which are hybrid yield course out there and lot more diversified within a sector. So energy has one sector, but it will have a storage and transmission and renewable and all in one yield co, right? So there is no sector specific. India started with sector specific, because it was led by developers, right? And as I think Harsh mentioned, as it’s getting evolved more in terms of independent, professionally managed, asset managers led growth, I think we will see also hybrid InvITs which will come up.

Saying that, I think AC is an important factor, but currently it is not a large focus on — in InvITs and REITs in a manner that there are certain — the corporates do have an ESG section, at least I think InvITs and REITs are yet to evolve. And primarily I think the reason has been that most of the investor if you look at in large REITs and InvITs are anyway global funds. So, you will find these global LPs and global capital, which anyway in their mandate follows an ESG framework. But it is not being well communicated out is my view in — from the REITs and InvITs to the market. By letting a lot of these large InvITs and REITs are falling those ESG framework, I think it is not very well articulated out to the market.

And over a period of time, I expect that as that articulation happens, the benefit what is available on ESG led investments, which are currently available, let’s say for example in climate bond and things like that should also start flowing to an InvIT. Currently, I think that market is yet to be developed, but I think the corporates do take an advantage of ESG bond. And I think at a point of time, I’m sure there will be certain factor of ESG and I think certain investor who will invest into the units of more ESG scored InvITs, will become also more kind of lucrative and attract a certain different kinds of capital. But I think it’s a journey. It will evolve as we move forward.

I think more communication will happen from InvITs and REIT on the ESG. And I’m sure most set of investors globally will come in, who also want an ESG as a sector while investing. And hence it will also evolve the sector and bring more interest into certain asset class.

Naveen Vaidyanathan — Director

Right. Right. We would love to continue this interesting discussion. But due to shortage of time, I would now like to conclude this session. If you have any further questions, please write to events@crisil.com. On behalf of CRISIL, I convey our sincere thanks to all of you for taking part in today’s webinar. We hope that you found today’s discussion insightful and timely. We also hope that your queries have been answered satisfactorily. I express my heartfelt thanks to the speakers for the evening, Mr. Subahoo Chordia, Mr. Pushkar Kulkarni, Mr. Harsh Shah and Ms. Ami Momaya, for sharing their insights, experiences and precious time today. Thank you and goodbye.

Subahoo Chordia — Head – Infrastructure Yield Strategy at Edelweiss Financial Services

Thank you.

Pushkar Kulkarni — Managing Director Infrastructure & Sustainable Energies CPPIB India Advisors Private Limited

Thank you.

Ami Momaya — Director, KKR & Company

Thank you.

Naveen Vaidyanathan — Director

Thanks. Bye.