December 2020

 The pandemic and the associated lockdowns have severely impacted the infrastructure sector, along with the rest of the economy. Kick-starting infrastructure activity will require an enormous corpus of funding. Policymakers must find ways to attract financiers by easing existing bottlenecks and removing tax anomalies.

As of now, banks are extremely conservative in exposures and NBFCs are cash-strapped, and still reeling from the collapse of IL&FS. It is likely, given the economic contraction, that banks and NBFCs will see a sharp rise in stressed assets. Hence, financing may have to come from alternative sources.

The stock market, the PE-VC space and the bond market all assume a great degree of importance. There are both positive and negative trends. The stock market has displayed resilience and, indeed, there have been two successful infrastructure IPOs, with Likhitha Infrastructure and Mazagon Dock Shipbuilders listing at premiums.

The PE space has seen continued interest and the entry of sovereign wealth funds (SWFs) and pension funds should enable more activity. There is a clear trend of a preference for operational brownfield assets. In the bond market, the slow transmission of rate cuts, a very illiquid secondary bond market and the lack of instruments such as credit default swaps are hindrances to growth. If Jio Platforms is excluded from consideration, the VC-PE space has seen contraction. But the corporate bond market did see support from mutual funds and insurance companies.

The disinvestment programme is understandably in trouble. However, the offer for sale of public sector units such as Hindustan Aeronautics Limited and the Indian Railway Catering and Tourism Corporation did receive a good response from non-retail investors. The strong equity sentiment could make a success of IPOs such as those of RailTel Corporation of India and the Indian Railway Finance Corporation. But the key to coming anywhere close to the disinvestment target will be the listing of the behemoth LIC. There has been little interest in Bharat Petroleum Corporation Limited and Air India so far. However, the privatisation of airports has seen a good response from the Adani Group. Municipal bonds of the Lucknow Municipal Corporation also received oversubscription.

The quasi-SWF, the NIIF has seen more activity. The government is committed to pumping Rs 60 billion into the NIIF’s debt platform over two years, and multilateral agencies and overseas pension funds have also shown interest in the NIIF. The government is reportedly considering giving IIFCL the DFI tag, which will help it raise cheaper finance. The government is also creating an SPV to debt-finance NBFCs up to a maximum of Rs 300 billion.

Nevertheless, credit flow to infrastructure projects exhibited a negative growth rate in 2019-20. Financial closures for HAM-based road projects have been hit by falling interest rates. But the sentiment did improve in the second and third quarters of 2020-21.

Tax anomalies need to be cleared up. For example, the carry forward of losses under Section 79 of the IT Act for InvITs when they acquire an SPV needs to be looked at. There is also a growth opportunity in infrastructure insurance.

It is said that every crisis creates an opportunity. If this one is used constructively, the structure of infrastructure financing could improve and be put on a more stable footing.


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