India’s infrastructure development requires various sources of financing to maintain its dynamic growth trajectory. Financing has traditionally come from budgetary support by the central and state governments or from commercial banks. India’s focus on infrastructure development has garnered attention, as a result of which several projects are now being partly financed by multilateral agencies. Additionally, a trifecta of fiscal strategies has been instrumental in supporting infrastructure creation. These are infrastructure investment trusts (InvITs), bonds and equity investments.
The sector has long expressed the need for an alternative to bank guarantees, such as surety bonds, which support India’s pro-business agenda. In line with this, the introduction of surety bonds has been a welcome move for individuals willing to undertake higher risks due to financial stability and a sense of security.
With these developments, the long-standing mismatch between the pace of infrastructure growth and the available avenues for financing is slowly being overcome. With the funding landscape evolving dynamically, investment patterns have now shifted to accommodate various investment vehicles suitable for different infrastructure sectors.
Foreign funds on the rise
India has significantly enhanced its global competitiveness and private capital attraction through economic liberalisation, proactive investment facilitation and the introduction of alternative funding avenues. The foreign direct investment (FDI) policy, allowing 100 per cent foreign investment via the automatic route in most infrastructure sectors, has been pivotal in this transformation. Strategic initiatives such as PM Gati Shakti, the National Logistics Policy, Sagarmala Project and the Bharatmala Pariyojana have further bolstered foreign investment. As a result, FDI inflows have experienced substantial growth, with a notable 72 per cent year-on-year increase, reaching Rs 11.2 trillion in 2023-24, up from Rs 6.5 trillion in the previous year.
Multilateral development banks, including the Asian Development Bank (ADB), New Development Bank, Asian Infrastructure Investment Bank (AIIB) and Japan International Cooperation Agency (JICA), have played a crucial role in channelling funds from developed countries to developing nations such as India.
Over the past 15 months, JICA has extended significant loans for various projects, including Rs 44.74 billion for the Mumbai Metro Line 3 project, Rs 272.83 billion for the Vadhavan port project and Rs 28.09 billion for the Chennai Peripheral Ring Road project, while also committing to enhance construction site safety. Similarly, ADB has sanctioned loans for diverse infrastructure initiatives, such as $240 million for rooftop solar systems, Rs 13.74 billion for the Imphal Ring Road project and Rs 14.54 billion for upgrading roads in Madhya Pradesh. Meanwhile, AIIB has shown interest in InvITs and is set to lead funding worth Rs 25 billion in the Sustainable Energy Infra Trust (SEIT), having already invested Rs 4.86 billion in January 2024. Additionally, it is on the lookout for a stake in IndiGrid’s new power transmission platform.
The active involvement of these lenders has not only provided technical and project structuring support but has also mitigated risk perceptions among other foreign investors.
Public route
The initial public offering (IPO) market has experienced significant growth over the past year, driven by robust economic activity, pre-election capital market opportunities, and positive domestic and foreign investor sentiment. The infrastructure sector maintained strong momentum amidst these favourable conditions. Notable issuances include JSW Infrastructure Limited’s Rs 28 billion IPO, JSW Energy Limited’s Rs 50 billion qualified institutional placement and Indian Renewable Energy Development Agency Limited’s Rs 21.5 billion IPO, which was oversubscribed by 38.8 times.
The Bharat Highways InvIT’s IPO saw a subscription of 37 per cent, Bharti Hexacom Limited’s IPO was subscribed 29.88 times and Alpex Solar’s IPO was subscribed 303 times. In a minor setback, Ceigall India Limited, an emerging road sector player, witnessed subdued market sentiment towards its issuance compared to initial expectations. However, with InvITs backing the sector, the investment climate is expected to remain positive.
In other recent issuances, ACME Solar Holdings Limited filed for an IPO worth Rs 30 billion and Matrix secured Rs 3.5 billion in a pre-IPO round. In addition, various cross-sector public issuances are in the pipeline, with Ecom Express, Afcons Infrastructure Limited, BlackBuck and StarAgri already announcing plans to go public.
InvIT action
Fuelled by the prospects of stable returns, fundraising via InvITs and real estate investment trusts (REITs) reached Rs 171.16 billion, a 14-fold year-on-year surge. According to the Securities and Exchange Board of India (SEBI), there are currently over 30 registered InVITs, REITs, and SM REITs, with an asset base of over Rs 6.5 trillion. The hype around InvITs has attracted a new set of investors for sectors such as renewable energy, roads and power. Two notable public issues were launched by Cube Highways Trust ($638 million) and Intelligent Supply Chain Infrastructure Trust ($366 million). In line with market expectations, the National Highways Authority of India’s InvIT raised around Rs 160 billion as part of its monetisation initiatives. In January 2024, SEIT raised Rs 22.62 billion via an initial offering of its units. Additionally, during 2023-24, IndiGrid raised a total of Rs 10.7 billion. Furthermore, the market saw the first-ever offer-for-sale by the telecom InvIT Data Infrastructure Trust, which raised Rs 20.71 billion.
Changing hands
The infrastructure sector continues to be favoured by private equity and venture capital investments. It has been interesting to see the sector slowly outranking industries such as financial services and technology to be a front runner. The overall uptick in equity and debt financing can be attributed to the robust pipeline of government-backed assets. In 2023, the infrastructure sector attracted around $11.6 billion across 57 merger and acquisition deals, representing a year-on-year increase of 28 per cent.
In recent acquisition moves, UltraTech Cement Limited acquired an additional 32.72 per cent stake in India Cements Limited for Rs 39.54 billion, Brookfield acquired ATC India Tower for $2 billion, KKR InvIT’s acquired 12 road assets for $1.08 billion, Actis acquired four hybrid annuity model assets for Rs 15 billion, and Indian Oil Corporation Limited invested Rs 16.6 billion as equity in a joint venture with NTPC Limited.
A new trend is emerging, with a wide range of investors becoming increasingly bullish on new electric vehicle (EV) opportunities, vying to claim a share of the EV pie. This investment trend extends beyond start-ups, as legacy automotive companies have also attracted significant foreign funding. While most venture capitalists have favoured start-ups, private equity funds have leaned towards funding established original equipment manufacturers. For instance, British International Investment recently committed $250 million to Mahindra & Mahindra’s four-wheeler EV division. Meanwhile, BluSmart raised around $24 million to expand operations, and Perpetuity Capital, an EV financing start-up, raised Rs 70 million via non-convertible debentures from N+1 Capital and RevX Capital.
National Investment and Infrastructure Fund Limited has also ventured into the e-mobility space by backing Ather Energy, investing in Mahindra’s electric three-wheeler division and supporting a network of e-buses via Greencell Mobility.
In 2023, the largest exit occurred in the logistics sector, with Tiger Global and Accel selling a combined 4 per cent stake in Flipkart to Walmart for $1.4 billion.
Future funding frontiers
While alternative infrastructure financing sources have made significant strides, their full potential remains unrealised. For instance, with record-high infrastructure bond issuances from banks such as the State Bank of India (Rs 200 billion) and the National Bank for Financing Infrastructure and Development (Rs 100 billion), the market exhibits strong potential for growth.
In another positive development, the government has set up an international finance centre in Gujarat (also known as GIFT City), offering Indian issuers access to foreign currency capital with SEBI-backed tax incentives, making it a strategic entry point. Coupled with the continued viability of InvITs for capital recycling, private equity, venture capital investments and international loans are expected to continue. Additionally, in order to guarantee sector growth and expansion, financial collaborations will play a crucial role.
The comprehensive and proactive adoption of diverse financing instruments could prove pivotal for the Indian economy, potentially accelerating its journey towards the $5 trillion target while simultaneously meeting infrastructure goals.
Harman Mangat