The bond market is witnessing long tenures, a favourable risk profile, adequate risk-adjusted returns, and improved recovery prospects. As a result of this, large global investor funds are competing for equity and debt investment opportunities in the Indian infrastructure sector, which has undergone a substantial turnaround in recent years. Several prominent worldwide investors, including Blackstone, Brookfield, KKR, the Macquarie Group, CPP Investments and Caisse de dépôt et placement du Québec, have made investments.
Efforts have been made to address the challenges plaguing the infrastructure sector and consequently improve the perception of risk. For instance, there is greater risk sharing in granted contracts, which is why concession agreements have been updated to overcome the bottlenecks that used to impede projects, and the increased role of central agencies as important stakeholders has improved operational performance and, as a result, investor confidence.
Corporate bond market
During 2021-22, a sum of Rs 115.89 billion was raised through public issuances of corporate bonds, roughly 2 per cent of the Rs 5.88 trillion raised through private placement. In terms of value, 80 per cent of issuances were AAA-rated, reflecting the demand for highly rated instruments. The Securities and Exchange Board of India (SEBI) has made attempts to increase the transparency and efficiency of the private placement process by introducing the electronic bidding process at stock exchanges. Yet, private placement has an overwhelming preference. The market regulator is now evaluating a market-making framework applicable to all listed issuers that have issued non-convertible debentures (NCDs) and have privately issued NCDs with an outstanding balance of Rs 5 billion or more.
As of March 2022, owing to the combined effort of regulators and the government, the corporate bond outstanding has surpassed Rs 40 trillion. However, as a percentage of GDP in India, it is only 18 per cent, compared to 36 per cent in China, 80 per cent in Korea, and 120 per cent in the United States ((the highest)). As per the Reserve Bank of India, multiple factors are at play behind the shallow secondary market, including the small size of issuances, which average Rs 1.30 billion per issuer; the nature of the issue, which is private placement as opposed to public issuances in other markets; the low holdings, which are limited to institutional investors and not retail investors as in the United States; and the pricing and interest rate risks that any corporate bond issuer faces.
As liquidity conditions tighten, it is becoming more difficult for companies to raise funds from institutional investors alone. Due to this, public issuances are picking up pace. In 2022-23, as of November, companies have raised Rs 57.47 billion through public issues, compared to Rs 115.89 billion in 2021-22. The success of the National Highways Authority of India (NHAI)’s infrastructure investment trust (InvIT) in raising Rs 15 billion through a public issue has infused confidence in other issuers as well. Adani Enterprises Limited intends to raise about Rs 20 billion through a retail bond sale by the end of 2022-23. With the interest rates rising, the corporate bond market is expected to see more activity. Issuers are rushing to lock in rates before borrowing costs rise too much and also to ensure that project costs do not escalate due to lack of funds.
Growing momentum
During the past five years, as per CRISIL research, annual bond issuances have averaged between Rs 6 trillion-Rs 7 trillion, with the infrastructure sector contributing roughly Rs 1 trillion in India. Even within the infrastructure space, public sector undertakings (PSUs) have been the leading issuers, accounting for 51 per cent of the market. Domestic bond markets must now play a larger role in the infrastructure industry, given the fact that global investment firms have also amped up their game.
The bonds in the Indian infrastructure market have thrived with a host of issuances. In January 2022, the New Development Bank (NDB) 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.
Greenko Wind raised $750 million for an energy storage plant in Andhra Pradesh through a global bond offering. Delhi International Airport Limited issued NCDs worth Rs 10 billion to part finance Phase 3A of the Delhi airport expansion project.
India Infrastructure Finance Company Limited (IIFCL) raised Rs 15 billion through a 10-year bond at a coupon of 7.17 per cent after a span of eight years. Prior to this, the company subscribed to a Rs 3.25 billion NCD issued by the Virescent Renewable Energy Trust (InvIT). Power Grid Corporation of India Limited forms the largest chunk in the bond portfolio, at Rs 5 billion, with PNC Infratech obtaining about Rs 1.50 billion in subscriptions from IIFCL. The lender is set to double its investments in bonds and investment trusts during 2022-23.
Green steam
With climate change and environment, social and governance themes gaining prominence, the interest in green bonds is increasing in India. In compliance with the borrowing plan for the second half of 2022-23, the Ministry of Finance will issue Rs 160 billion in sovereign green bonds by March 2023. The total market borrowings for 2022-23 have been budgeted at Rs 14.3 trillion, with roughly Rs 6 trillion remaining for the next five months.
The first-ever green bonds issued by the Indian government would prioritise funding solar power projects, followed by wind and small-hydro power projects. The main rationale behind this move is to tap the growing investor base in this space. Currently, there are several investors that have dedicated funds to invest in green bonds, and the government intends to increase the participation of international investors in the domestic bond market. It is expected that the government’s green bonds will set a precedence and are likely to open up the local market further.
India’s green hydrogen industry is gaining ground. Marquee investors such as RIL, the Adani Group, and the Hinduja Group have already announced their intention to invest in the same. An India-Singapore hydrogen hub will also be explored. India may also pitch green bonds and similar new-age investment vehicles to Singapore.
In January 2022, IRFC raised $500 million through green bonds, while India Clean Energy Holdings raised $400 million. During the same month, ReNew Energy Global raised $400 million by issuing senior secured dollar notes, recognised as green bonds by the Climate Bonds Initiative, at a rate of 4.5 per cent. The bonds were also listed on the Singapore Exchange. In March 2022, Avaada Energy raised Rs 14.4 billion in green bonds, making it the country’s largest AAA-rated green bond.
Bank bonds
For project financing and affordable housing, ICICI Bank is projected to 
raise up to Rs 10 trillion through infrastructure bonds. This will assist in mitigating the asset-liability management (ALM) issues encountered when granting project loans to infrastructure and critical industry sectors. In June 2022, ICICI Bank’s long-term infrastructure bond borrowings were over Rs 385 billion. In August 2022, Bank of Baroda raised Rs 10 billion through these bonds at a coupon of 7.39 per cent. It has received further approval to raise up to Rs 50 billion via these bonds.
In July 2022, loans from the banking sector to the infrastructure sector increased by 11.1 per cent annually to reach Rs 12.14 trillion.
In sum
Several reforms have been introduced in the infrastructure sector in order to address the concerns of developers and investors. In the near future, the issuance of green bonds is expected to increase as the country inches closer to meeting the goals of the 26th UN Climate Change Conference of the Parties. Additionally, the National Monetisation Pipeline plans to recycle around Rs 6 trillion worth of government infrastructure assets by 2025. Many of these assets will find their way into InvITs and present an investment opportunity for bond markets.
