Economic Tailwinds: Uptick in infrastructure financing

Uptick in infrastructure financing

Since the turn of the century, infrastructure has been regarded as India’s bright spot and has played a crucial role in the country’s emergence as one of the fastest gro­w­ing econ­omies. The public-private partnership mo­del has helped attract both domestic and foreign in­vestment, thereby boosting the economy. Fina­ncing infrastructure projects in India is difficult due to the asset-liability mismatch in banks and non-banking financial ins­ti­tutions, as well as sector-specific res­trictions. India requires infrastructure long-te­rm investments that provide economic retur­ns in addition to monetary re­turns. In this regard, the new development financial instituti­on, National Bank for Financing Infras­tructure and Development, has created fav­ourable conditions for quickly raising leverage debt.

IPO frenzy

Following a spurt in global initial public offering (IPO) activity in recent months, Indian markets have reached new highs. India’s IPO situation is not as dire as the global scenario, with 16 companies raising Rs 409 billion in IPOs in the first five months of 2022, a 41 per ce­nt in­cr­ease ov­­er the same period in 2021. However, IPOs in the infrastructure space continued to be muted apart from GR Infraprojects, which made a stro­ng market debut with its IPO that was subsc­ribed 102.58 times in July 2021. Delhivery be­ca­me the first unicorn to gain regulatory ap­­p­ro­­val to list on the domestic bourses in 2022. The company was able to raise ar­ound Rs 24 billion through its IPO in May 2022. Be­sides, there are a host of companies with public issues on the anvil.

  • Inox Green Energy Services Limited’s board ap­proved a proposal to raise Rs 9 billion th­rough an IPO. Later, the ancillary of Inox Wi­nd listed fresh preliminary papers to raise Rs 7.4 billion instead.
  • As of July 2022, Sterlite Power Transmis­sion Limited was awaiting favourable market conditions for launching a planned IPO of Rs 12.5 billion. During the same month, Go First announced the likelihood of raising mo­ney through an IPO due to stressed financials following the pandemic.

Overhaul of infrastructure financing via InvITs

Indian infrastructure has had a few triumphs and several setbacks. By 2013, the government had made its objective clear – to develop a frame­work to attract long-term foreign private finance in the infrastructure sector. At the th­reshold, three crucial elements were discovered to make the investment proposition profitable — tax-optimal regular distributions, a diversified risk portfolio and a well-regulated, transparent in­vesting platform. The Securities and Exchange Board of India (SEBI) conceived infrastructure investment trusts (InvITs) to meet the criteria. There are 18 InvITs registered with SEBI. Bha­rat Highways InvIT, sponsored by GR Infra­projects, is the most recently registered InvIT.

  • The National Highways Authority of India (NHAI) is planning to raise up to Rs 40 billion for its InvIT, by forming a new special pu­rpo­se vehicle under the trust structure.
  • The Ministry of Railways (MoR) is planning to monetise the redeveloped stations through real estate investment trusts. While the target for 2022-23 is close to Rs 300 billion, the MoR is planning to offer assets in smaller tranches.
  • Virescent Renewable Energy Trust (VRET) raised Rs 10 billion in non-convertible de­b­entures (NCD) in its debut issuance, which was split into three tranches of three, five, and seven years.

Bond market

Infrastructure bonds have accounted for about 25 per cent of issuances in the overall corporate bond market (cumulative issuance of Rs 8.3 trillion during 2016-17 up to the first half of 2021-22). Public sector entities, such as NHAI, NTPC Limited, NHPC Limited and Powergrid account for almost 50 per cent of infrastructure bond issuances, whereas private sector is­suances are well diversified across issuers and sectors. The increase in private sector iss­u­an­c­es in 2020-21 was driven by large issu­ances from Reliance Jio.

  • In January 2022, the Indian Railway Finance Cor­poration raised $500 million and India Clean Energy Holdings raised $400 million through green bonds. In the same month, the New Development Bank successfully is­sued CNY 3 billion worth of RMB-denominated bonds in the China Interbank Bond Mar­ket, while Reliance Industries Limited repurchased around Rs 40 billion worth of local bonds from its investors.
  • Avaada Energy raised Rs 14.4 billion in green bonds in the Indian capital market, making it the country’s largest AAA-rated green bond by any renewable energy developer.
  • Greenko Wind raised $750 million for an en­ergy storage plant in Andhra Pradesh throu­gh a global bond offering.
  • In May 2022, the Power Finance Corporation Li­mited listed its maiden Euro 300 million green bonds on the Luxembourg Stock Ex­change.
  • Delhi International Airport Limited issued NCDs worth Rs 10 billion to part finance Ph­a­se 3A of the Delhi airport expansion project.

Multilateral funding

  • The Asian Development Bank (ADB) has be­en a crucial lender to infrastructure projects in India. In 2021, ADB committed an amount of approximately $40,080 million to infrastructure projects in India for sectors including energy, transport, water and other urban infrastructure and services.
  • In March 2022, the Japan International Co­o­peration Agency signed loan agreements with the Government of India to grant Ja­pa­nese ODA loans of up to JPY 250 billion for four infrastructure projects spanning across sectors such as roads, railways and water.
  • In June 2022, the World Bank authorised a $750 million development policy loan to the Indian government to promote reforms that leverage private sector investment in infrastructure, small businesses and green finance markets.

Other key developments

  • The Central Board of Direct Taxes (CBDT) has approved CPP Investments, Qatar Holding LLC, among others as eligible for income tax relief on investments made in India.
  • In September 2021, the India Resurgence Fu­nd, a joint venture between Piramal En­ter­prises and Bain Capital Credit, invested $75 million (or Rs 5.55 billion) in Thrissur Expre­ss­way Limited (TEL), part of KMC Cons­truc­tions Limited, for the restructuring of TEL’s existing debt and for last-mile financing to enable project completion.
  • The State Bank of India sold KSK Mahanadi Power Company’s non-performing loan acc­ount to Aditya Birla Asset Recons­truc­tion Co­mpany Limited for Rs 16.22 billion, acc­ep­ting a haircut of nearly 58 per cent again­st the total outstanding loans.