SEBI Cuts Trading Lot Size of Privately Placed InvITs to ₹25 Lakhs: Implications for Investors and the Market

The Securities and Exchange Board of India (SEBI), in a significant move, has reduced the trading lot size for units of privately placed Infrastructure Investment Trusts (InvITs) to ₹25 lakhs from the earlier requirement of ₹1 crore. This decision, aimed at enhancing investor participation and improving liquidity in the InvITs market, is expected to create ripples in both the investment landscape and infrastructure financing. The shift in regulatory framework is a step forward in making InvITs more accessible to a broader pool of investors, thereby supporting long-term infrastructure growth in India.

This article explores the nuances of the SEBI decision, its potential impact on investors, market liquidity, and the broader infrastructure development landscape in India.

What are InvITs?

Before delving into SEBI’s recent regulatory change, it is essential to understand what InvITs are and their role in the financial ecosystem. Infrastructure Investment Trusts (InvITs) are collective investment vehicles, much like mutual funds, that allow individual and institutional investors to invest in infrastructure projects such as roads, bridges, power transmission lines, and telecom towers. InvITs pool funds from a variety of investors to invest in income-generating infrastructure assets.

Privately placed InvITs, as the name suggests, are not listed on stock exchanges and are typically accessible to high-net-worth individuals (HNIs) or institutional investors. Historically, SEBI had mandated a minimum trading lot size of ₹1 crore, which made participation in these assets restrictive and limited to a select group of investors.

SEBI’s Decision to Reduce the Trading Lot Size: An Overview

On [insert date of announcement], SEBI decided to reduce the minimum trading lot size for privately placed InvITs to ₹25 lakhs. The earlier threshold of ₹1 crore acted as a significant barrier for retail and small institutional investors who wanted to gain exposure to India’s infrastructure sector but were limited by the high entry requirement. This regulatory change is part of SEBI’s broader agenda to enhance the liquidity and attractiveness of InvITs.

The reduction in lot size is expected to bring several benefits, including:

• Increased Accessibility: The revised lot size will allow a larger pool of investors, including mid-tier institutional players and high-net-worth individuals (HNIs) with lower capital bases, to participate.
• Improved Liquidity: A smaller trading lot size can lead to higher volumes in the market, improving liquidity for InvIT units, which has been a challenge for privately placed InvITs.
• Alignment with Public InvITs: Publicly listed InvITs already have lower lot sizes, making this move a step towards creating parity between privately placed and publicly listed InvITs, thus promoting a more unified investment framework.

Rationale Behind the Move

SEBI’s decision aligns with the Indian government’s larger objectives of increasing private participation in infrastructure development. The regulatory body has been working towards creating a more inclusive investment environment that allows both large and small investors to contribute to, and benefit from, the country’s infrastructural growth.

Key reasons for the change include:

• Encouraging Retail Participation: By lowering the minimum lot size, SEBI aims to open the doors for a larger number of retail investors. While ₹25 lakhs is still a significant sum, it’s far more accessible than the previous requirement of ₹1 crore.
• Boosting Infrastructure Financing: Infrastructure projects are capital-intensive, and India’s growth ambitions require substantial investments in this sector. InvITs play a pivotal role in sourcing funds for infrastructure projects. By increasing the investor base, this move will provide an additional source of capital for infrastructure development.
• Enhancing Market Liquidity: One of the primary criticisms of privately placed InvITs has been the lack of liquidity due to high entry barriers. A smaller lot size can increase trading volumes and encourage more frequent transactions, making the market more liquid and efficient.

Potential Impact on Investors

1. Retail and Mid-Tier Investors

The most immediate beneficiaries of SEBI’s decision are retail and mid-tier investors, who were previously excluded due to the high investment threshold. While ₹25 lakhs still targets relatively affluent investors, it provides access to those who may not have the means to invest ₹1 crore but are looking for exposure to stable, income-generating infrastructure assets.

This change may also attract family offices and small institutions that were previously deterred by the large ticket size. For investors, InvITs provide a stable source of income, typically through dividends and interest from the underlying infrastructure assets. Additionally, because InvITs invest in operational projects, they carry lower risk compared to greenfield projects, which adds to their attractiveness for long-term investors.

2. Institutional Investors

For larger institutional investors, while this change may not directly impact their investment decisions (as their capital allocation strategies often involve far greater sums), it does provide an opportunity to increase liquidity in the market. Greater participation from smaller investors enhances the exit options for institutions, which is a positive development from a liquidity standpoint.

3. Portfolio Diversification

InvITs offer a unique opportunity for portfolio diversification. With infrastructure projects yielding relatively stable cash flows, investors can gain exposure to a different asset class compared to traditional equity or debt investments. For those seeking income stability and capital appreciation, InvITs present a viable option, especially given the lower lot size.

Impact on the InvIT Market

1. Increased Liquidity and Trading Volume

The reduction in lot size is expected to boost trading activity in the InvIT market. Higher liquidity will make it easier for investors to enter and exit positions, thus making InvITs a more attractive investment. Increased trading volumes will also contribute to the overall depth of the market, further establishing InvITs as a credible investment instrument.

2. Potential for New InvIT Offerings

The improved accessibility of InvITs may encourage more private infrastructure companies to consider setting up InvITs as a way of raising capital. This could lead to an expansion of the InvIT market, providing more investment opportunities for those interested in infrastructure financing.

3. Support for India’s Infrastructure Development

India’s infrastructure sector, from roads and highways to power generation and transmission, requires massive capital investment. SEBI’s decision to lower the trading lot size of InvITs indirectly supports infrastructure development by widening the investor pool. With greater participation from a diverse set of investors, companies can raise more funds to build critical infrastructure.

Conclusion

SEBI’s move to reduce the trading lot size for privately placed InvITs from ₹1 crore to ₹25 lakhs is a progressive step towards making infrastructure investment more accessible to a wider range of investors. It addresses long-standing concerns about liquidity and market depth while aligning with India’s infrastructure financing goals. As retail and mid-tier investors gain more opportunities to participate in this growing sector, the future of InvITs looks promising. In the long term, this change will not only bolster the market for InvITs but also contribute to the larger objective of infrastructure development in India.

This regulatory shift marks an important milestone in the evolution of India’s financial markets, as it encourages broader participation in one of the most crucial sectors for the country’s economic growth.