India’s rising fiscal deficit and debt-to-GDP ratio have long highlighted the need for increased private investments in infrastructure. Furthermore, the country’s ever-evolving infrastructure development landscape has made exploring new financing mechanisms all the more urgent and crucial. In an era marked by climate change, rapid urbanisation, ambitious national goals and India’s status as the fastest developing economy, various financing gaps have come up, and along with it, potential innovative solutions. Fast-forward to now, infrastructure is no longer a cash-strapped or a budgetary-reliant sector. A number of fiscal solutions, such as equity markets, debt securities and infrastructure investment trusts (InvITs), have been instrumental in supporting infrastructure development.
Considering the quantum of parallel cross-sector developments, the government has been proactive in providing targeted policy interventions. For instance, the infrastructure sector has long expressed the need for an alternative to bank guarantees, 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. Favourable regulatory developments have positioned infrastructure as a safe asset class, attracting various buyer classes seeking a stake in India’s growth story.
With developments like these, the long-standing mismatch between the pace of infrastructure growth and available avenues for financing is slowly being overcome. Furthermore, there are now various investment vehicles available to meet the needs of different infrastructure sectors.
Growing role of diverse funding avenues
In recent years, sectors have witnessed the transition from a constrained fiscal environment to a more flexible one. The roads sector, traditionally reliant on budgetary support, has shifted to securing loans from international banks, mobilising funds via InvITs, and more recently, aiming to raise up to Rs 10 billion via green bonds to fund an expressway. Multilateral banks are now gaining exposure in Indian railway projects. Airport projects are leveraging the debt market, primarily bond issuances. The energy sector is tapping the initial public offering (IPO) market, while also sustaining interest from private equity (PE) and venture capital (VC) firms and attracting investments from global companies and international banks. Indian ports have been receiving funding from the Maritime Development Fund and the National Infrastructure Investment Fund (NIIF), along with government support. Considering the increasing awareness of water security, the water and waste sector is garnering investor attention in the form of sanctions and grants. Further, there has been heightened interest from foreign investors in data centres. In select metro project cases, public-private partnerships and viability gap funding have also played key roles.
Positive lending sentiment
Broadly, despite some operational hiccups in the past, lending institutions have aided and accelerated infrastructure development and continue to remain bullish on the sector’s growth prospects.
Following the banking sector reforms in 1991, major development finance institutions were converted into commercial banks. Since then, these critical intermediaries have made a comeback. In this context, the establishment of India Infrastructure Finance Company Limited, NIIF and the National Bank for Financing Infrastructure and Development has been a major milestone.
Similarly, with India’s increasing global competitiveness and the foreign direct investment (FDI) policy which allows 100 per cent foreign investment via the automatic route, multilateral banks such as Asian Development Bank, Japan International Cooperation Agency, New Development Bank and Asian Infrastructure Investment Bank have remained active, aiming for more exposure.
Over time, higher capital expenditure by the government, mature and revised model concession agreements and stronger regulatory frameworks have improved the confidence of banks in the infrastructure sector. To put numbers into perspective, non-performing assets (NPAs) were at a peak of 30 per cent during 2015. Currently, the gross NPA ratio of the sector has reduced to a multi-year low of 2.8 per cent as of March 2024, showing an overall improvement in asset quality and reduced risk of slippage. Further, outstanding as of March 2024, gross bank lending to the infrastructure sector stands at Rs 13 trillion.
IPO route gains visibility
The Indian IPO market has experienced significant growth, driven by robust economic activity, pre-election capital market opportunities and positive domestic and foreign investor sentiment. Monetary policy changes have also influenced IPO listing trends. From 2022 to mid-2023, the Reserve Bank of India implemented a series of interest rate hikes. This resulted in different outcomes for different sectors. Fortunately, infrastructure sectors, which have lower sensitivity to these fluctuations, maintained stability in their public listing activity.
Lately, the IPO market has seen several firsts, including the IPO of a natural gas distribution company, IRM Energy Limited, which raised approximately Rs 5.45 billion. The telecom sector, previously mostly muted in capital market activity, engaged in a public issue by SAR Televenture Limited, raising around Rs 0.25 billion. JSW Infrastructure Limited’s issue, valued at Rs 28 billion, was the largest in 2023-24.
Compared to a time when mostly medium and large-sized companies opted for IPOs, this current listing frenzy, with even electric mobility and water companies going public, is a testament to India’s financial market maturity.
Banking on bonds
Bond issuances have eased capital needs to some extent. With deposit mobilisation posing a challenge, higher risks associated with Tier II and AT-1 bonds and regulatory exemptions from certain reserve requirements, many state-owned banks have tapped this route. In 2024-25 (till November 2024), over Rs 740 billion was raised. Of this share, State Bank of India accounts for Rs 300 billion; Bank of Baroda, Indian Bank and Canara Bank for Rs 100 billion each; followed by Bank of India (Rs 50 billion), Axis Bank (Rs 39.25 billion), ICICI Bank (Rs 30 billion), Federal Bank (Rs 15 billion), and Bank of Maharashtra (Rs 8.11 billion).
However, currently, the market is still not deep enough to support the majority of the funding requirement. As per industry experts, the issuances are expected to reach Rs 1 trillion in 2024-25. If this pans out as expected, greater bond market activity can be expected on grounds of widespread confidence.
Assets changing hands
As infrastructure continues to grow, so do the mergers and asset sales transaction volumes. There will always be sellers wanting to exit the sector and cash in on their assets, as well as asset-hungry buyers focused on strategically investing in new assets. Since centre-backed assets maintain attractive valuations and are in high demand, the bidding environment remains competitive. For instance, the toll-operate-transfer (TOT) model has emerged as an effective monetisation mechanism for roads. For TOT-16, bids were received from InvITs (Highways Infrastructure Trust and IRB Infrastructure Trust), a private company (Adani Road Transport) and a global investor (Cube Highways). Aside from acquisition interest, more importantly, this validates new ways of mobilising funds. This acquisition, worth Rs 66 billion, will account for 40 per cent of the overall annual road monetisation target through the TOT model.
Renewable energy has continued to attract long-term investors, with energy storage companies now emerging as a key asset class. The EV segment has received renewed interest from VC firms. Various private investors have shown interest in acquiring port assets. Warehouses are on the PE radar. With the aim of becoming a digital economy by 2028, there are also immense opportunities in data centres, telecom towers and fibre.
Favourable financing outlook
The sustained interest in infrastructure assets is not a fleeting trend. In order to keep this sentiment alive, active participation from each sector is required to tap different avenues for long-term credit. Besides, the intermittent global economic volatility has made it crucial to prioritise utilising various available funding mechanisms.
Recent successful IPOs have strengthened market sentiment while giving hope to firms wanting to go public. The bond market exhibits strong growth potential. There are ample balance-sheet friendly acquisition opportunities across sectors. The advent of financial investor-led platforms is also gaining traction. Additionally, high foreign investor participation is helping India meet its infrastructure investment needs. Despite all the positives, greater retail participation is required for InvITs, along with wider asset monetisation activity across sectors.
With a momentum like this, India offers a flourishing and rising investment climate for both foreign and domestic investors. That said, investor sentiment for the medium-term remains optimistic.
Harman Mangat
