To meet the financing requirement of the infrastructure sector, the development of alternative funding sources has assumed greater importance in recent months. This is because banks, the traditional source of funds, have limited latitude for fresh lending to infrastructure projects. While the need to develop new sources has been widely understood, not much progress has been made. Many innovative financing options such as infrastructure investment trusts (InvITs) and bonds have been developed, especially for projects post construction. Though these new sources have failed to take off, recent developments aimed at encouraging them are casting a positive light on the country’s infrastructure financing space.
Infrastructure investment trusts
One of the most noteworthy proposals of the government for the development of infrastructure funding sources has been that of infrastructure investment trusts (InvITs). The finance vehicle was first proposed in Union Budget 2013-14. An InvIT is defined as a type of income trust that finances, constructs, owns, operates and maintains different infrastructure projects. The trust provides distribution payments to unit holders on a periodic basis. It is like a mutual fund that enables investment in the sector by pooling small sums of money from a multitude of investors for directly investing in infrastructure projects.
However, there were a number of grey areas that staved off investor interest in InvITs. There were issues related to taxation as well as exchange rates and payments (in the case of foreign investors). However, recognising these challenges, the Securities and Exchange Board of India (SEBI), under which the trusts are registered, introduced a number of changes in the guidelines. These series of changes by the regulator in the InvIT framework are expected to boost investor sentiment towards the vehicle.
In September 2016, SEBI amended regulations for InvITs, under which it allowed them to invest in two-level special purpose vehicle (SPV) structures through a holding company. This is subject to the InvIT having sufficient shareholding in the holding company and the associated SPV.
The regulator also removed the limit on the number of sponsors. (The extant guidelines permitted only three sponsors.) Besides, the trusts have been allowed to appoint majority directors in the SPV. The holding company will also be allowed to distribute 100 per cent of the cash flow realised from the SPV and at least 90 per cent of the remaining cash flow. SEBI has also approved a proposal to reduce the mandatory sponsor holding in the InvIT to 15 per cent and has rationalised the requirements for the private placement of the InvIT.
In a bid to make these instruments more attractive for raising capital, the regulator made it mandatory for a company looking to list an InvIT to disclose financial information, related party transactions and past performance. InvITs will also have to disclose their commitments, contingent liabilities, earnings per unit, total debt, net worth, and the debt-equity ratios before and after the completion of issues. It will also have to disclose the history of interest and principal payments of the InvIT and operating cash flows from projects for the past three years and the interim period, if any.
So far, SEBI has granted approval to InvITs proposed to be set up by companies such as IRB Infrastructure Developers Limited, the GMR Group and MEP Infrastructure Developers Limited. Recently, private power transmission company Sterlite Power Grid Ventures Limited also received approval to launch its InvIT to raise funds. Further, Reliance Infrastructure has announced plans to raise Rs 50 billion through selling a 51 per cent share in its proposed InvIT in the fourth quarter of 2016-17, in a bid to pare its outstanding debt.
Infrastructure debt funds
Infrastructure debt funds (IDFs), announced in the Union Budget 2011-12, are another promising source of long-term funds for infrastructure development. These are investment vehicles which can be sponsored by commercial banks and non-banking financial companies (NBFCs) in which domestic/offshore institutional investors, specially insurance and pension funds, can invest through units and bonds issued by IDFs. As per the regulations, they can be created either in the form of a mutual fund or an NBFC. The advantage of the NBFC route is that it can be leveraged; therefore, there are better chances for investors to earn higher returns.
However, so far, IDFs have had a slow start, mainly due to procedural issues. Under the mutual fund route, there are three key players – India Infrastructure Finance Company Limited (IIFCL), Infrastructure Leasing & Financial Services and Srei Infrastructure Finance Limited, while under the NBFC route, the key players are Larsen & Toubro (L&T) (L&T Infra Debt Fund), a consortium of banks led by ICICI Bank (India Infradebt) and Infrastructure Development Finance Company (IDFC Infra Debt Fund).
In April 2016, in a bid to revive activity in the infrastructure space, the central bank permitted IDF NBFCs to raise up to 10 per cent of their total outstanding borrowings through shorter tenure bonds and commercial papers, giving them the much-needed flexibility to manage their assets and liabilities.
Pension and insurance funds
Pension and insurance funds are one of the best-suited financial instruments to fund long-gestation infrastructure projects, as they overcome the asset-liability mismatch faced by banks that lend to such projects. However, given the poor structuring of projects and the funds’ fiduciary responsibilities, these players have been extremely cautious in providing finance to the infrastructure sector. Moreover, these institutional investors are not willing to take project risks without government guarantees.
This is reflected by the fact that, at present, the exposure of pension funds to the sector stands at around 8 per cent, despite being permitted a 15 per cent exposure level. As far as investment by the insurance sector is concerned, this situation has not changed over the years. In 2009-10, the figure stood at 7.51 per cent, increasing slightly to 8.56 per cent in 2013-14.
Meanwhile, the focus on credit enhancement is likely to open up avenues for insurance and pension funds to invest in the infrastructure sector. For instance, the Rs 5 billion Credit Enhancement Fund, announced in the Union Budget 2016-17 (to be anchored by IIFCL) will help raise the credit rating of bonds floated by infrastructure companies and facilitate investments from long-term investors such as insurance and pension funds. Besides IIFCL, the government is considering roping in banks such as the State Bank of India and Punjab National Bank for the fund. At the same time, some multilateral funding agencies like the Asian Development Bank and the International Finance Corporation have been approached for partnership in the initiative. The fund is likely to be operationalised soon. Further, many SWFs are considering expanding their footprint in the country’s infrastructure space, particularly in the power and maritime sectors.
Despite a lack of depth and liquidity in the country’s bond market, there has been some uptick in activity, supported by a number enabling measures recently introduced by the Reserve Bank of India (RBI). Companies such as Tata Power, Reliance Jio Infocomm Limited, Adani Ports and Special Economic Zone Limited, Tata Power Renewable Energy Limited and the Great Eastern Shipping Company raised over Rs 75 billion via bond issues. The government permitted six organisations (the National Highways Authority of India [NHAI], the Power Finance Corporation, the Rural Electrification Corporation, the Indian Renewable Energy Development Agency [IREDA], the National Bank for Agriculture and Rural Development and the Inland Water Authority) to raise a total of Rs 313 billion through bonds in 2016-17. In November 2016, NHAI raised Rs 100 billion through the route.
Fund-raising through masala bonds also kicked off during the year. In July, HDFC raised Rs 30 billion in the first such issuance by an Indian company. This was followed by Adani Transmission Limited which tapped Rs 5 billion and NTPC Limited which secured Rs 20 billion through the first of its kind green masala bonds. Green bonds have also found a number of takers. Axis Bank, Hero Future Energies,IREDA and YES Bank have together mobilised Rs 50 billion through issuance of these securities.
While the need for alternative investment vehicles and sources of infrastructure funds cannot be emphasised enough, it remains to be seen how these proposed vehicles take off. According to ICRA, InvITs are expected to raise equity capital to the tune of Rs 200 billion in the next 12 to 18 months. These structures have started attracting increasing interest and could be crucial for the estimated $30 billion capital that infrastructure projects need. With regard to IDFs, the lukewarm response witnessed so far is discouraging. However, it may be hoped that further easing of policy guidelines can revive some interest in this space.
As far as insurance and pension funds are concerned, their contribution could increase significantly if more credit-enhanced finance options and completed projects are offered. In the bond market, going forward, new issues are expected to emerge to fund infrastructure projects, including smart city projects.