Infrastructure :The right path for infra financing

BL radhika Merwin 14 Nov 2014

Infrastructure debt funds can take some of the burden off public sector banks in lending to long gestation projects

It is evident now that the only way to revive the Indian economy from its long slumber is to kickstart infrastructure projects. While various policy initiatives from the Government hold the key to rev up stalled projects and revive the capex cycle, infrastructure spending is vital. Infrastructure Debt Funds (IDFs), which were conceived to provide an additional funding route for such projects, appear to be well on track, tapping into pools of private capital.

Given that the Government can cough up about half the amount needed to fund long-term infrastructure projects, and the slowdown in the economy has further crimped the flow of government funds, more participation from the private sector is imperative to sustain long-term infrastructure development.

Banks, particularly public sector banks, have been at the forefront, providing the necessary funding and taking on risks associated with these long gestation projects. But banks’ increasing exposure to the infrastructure sector has led to asset liability mismatches in their balance sheet and increased their stock pile of stressed assets.

IDFs will not only free up banks’ balance sheets to take on fresh lending but also provide borrowers a low-cost financing option. This, along with infrastructure bonds that banks are now allowed to issue, should see greater participation from the private sector.

The first leg of the journey

The Finance Minister in his Budget speech for the year 2011-2012, announced the setting up of IDFs, and the RBI subsequently issued guidelines in September 2011 for setting these up.

IDFs are investment vehicles which can be sponsored by commercial banks and non-banking financial company (NBFCs) in India. Domestic or foreign institutional investors, specially insurance and pension funds, can invest through units and bonds issued by the IDFs.

An IDF can be set up either as a trust or as a company. A trust-based IDF is a mutual fund that is regulated by market regulator SEBI, and issues units to the investors. Under the company-based format, the IDF is an NBFC that issues bonds to investors. The IDF-NBFC is regulated by the RBI.

So far, three infra debt funds have been set up through the NBFC route and one through the MF route. For now, IDF-NBFC appears to be a preferred route for raising funds. The advantages of this route lie in the distinction between the two different formats.

There are three notable distinctions. One is the scope of financing. IDF-NBFCs are allowed to invest only in infrastructure projects which are created through the Public Private Partnership (PPP) route and have successfully completed one year of commercial production.

Hence these debt funds can finance projects under NHAI, ports, airports and metro rail . As they lend only to operational projects, they do not carry any construction risk.

The other risk mitigating features include a tripartite agreement between the project authority, the company and IDF-NBFC, and a compulsory buyout with termination payment, in case of a financial default.

However under an IDF-MF route, all projects — even the ones that are under-construction — can be financed. Hence the risk under this format is much higher.

The second distinction is more from an investor’s point of view. In case of the NBFC route, the money is raised through the issue of bonds, which is rated by a credit rating agency. The money raised is then lent for infra projects.

However under an MF route, each scheme lends to different projects, and investors in these schemes take a direct risk and exposure to such projects.

The last distinction is more technical in nature. IDF-NBFCs are allowed to issue bonds and hence can leverage themselves. Given that they need to maintain 15 per cent of risk weighted assets as capital, they can leverage themselves several times of equity of the IDFC-NBFC. Hence they can borrow more to lend more and so the costs of funds are cheaper.

In the case of IDF-MFs, since they issue units, question of leverage does not arise.

Hence the NBFC route is a lot easier to market, because it is easier to raise money through the bond market and pay a certain coupon rate. Under the MF route one cannot indicate rates and investors take a direct risk in the funded projects.

That said, one cannot ignore the merits under the MF route either. The market for an IDF-MF is larger as it can finance all projects. As this route gains acceptance among the more mature class of investors, it will play a vital role in infrastructure financing over the long-run.

Small leap

While infrastructure debt funds may appear tiny in the larger context of banks’ lending exposure to the infrastructure sector, over the next three to four years, these can make a huge difference in pooling private funds.

Banking sector’s lending to the infra space is about ₹8.7 lakh crore. This is the entire market for IDF-MFs. But for the NBFC format, the market size may be a fifth of this. While this number looks small, it will still help free up some of the banks’ funds for new projects. Also as the MF route gains ground, more assets — even riskier ones — can be taken over. Currently there are three IDFs under the NBFC format. L&T IDF, sponsored by L&T Infra Finance, has raised about ₹750 crore so far, and expects to have an asset base of about ₹1,000 crore by the end of this fiscal.

India Infradebt is another fund that is sponsored by four leading financial players and is said to have raised about ₹300 crore. The third fund is sponsored by IDFC, which is now transitioning into a bank and will transfer part of its assets under IDFC to the debt fund.

The general expectation from industry players is that over the next three years, IDFs through the NBFC route will be able to fund assets worth ₹25,000 crore.

IDFs are also well on track in providing fairly cheaper finance. Corporate borrowers are lent money at 10.5-11.5 per cent. This will improve the financial viability of infra projects.

Regulatory leeway

IDFs can thus complement banks in financing long term infrastructure projects. Public sector banks have been more active in lending to long gestation projects, which requires taking on the completion risk in the initial stages of the project. Banks are likely to increase their lending activity, given the regulatory leeway in raising funds for such projects.

The Reserve Bank of India (RBI) in July allowed banks to raise funds for lending to infrastructure sector without regulatory requirements such as CRR, SLR and Priority Sector Lending targets.

The RBI has now allowed banks to lend to very long-term projects, with an option to refinance it periodically. Banks can, say, lend for a 25-year project, with an option to roll it over after five years.

Hence, as the loan comes up for refinancing, it may be taken up by the same lender or a set of new lenders. This is where IDFs can step in and help banks free up funds for deploying in new projects. As the economy revives and the new capex cycle picks up, IDFs will play a central role in bringing in long-term funds for infrastructure project finance in the country.

Three mega infra projects worth Rs 25,000 cr cleared

Source : BS Reporter / New Delhi November 19, 2011, 0:17 IST


The government on Friday gave regulatory clearances to three mega infrastructure projects involving an investment of Rs 25,000 crore. These are the first among a few projects the government has shortlisted to be put on a fast track.


The projects cleared on Friday were of Hinduja National Power Corporation Ltd in Vishakhapatnam, L&T Metro Rail (Hyderabad) Ltd, and Simhapuri Expressways Ltd in Andhra Pradesh. These had been held up because of regulatory bottlenecks.


“The government should take steps to see the clearance of projects is fast-tracked… The clearances have been given for projects that will now be implemented. It is expected clearances for the rest of the projects will be given before the next meeting,” department of financial services secretary D K Mittal told reporters after a meeting chaired by finance minister Pranab Mukherjee to review the projects.


The first review meeting was taken by the finance minister on October 18, in which 12 projects worth Rs 1.7 lakh crore were discussed. At on Friday’s meeting, 12 more projects worth Rs 37,000 crore with investments in the range of Rs 1,500-5,000 crore were discussed. The government will take up more projects worth Rs 1,000-1,500 crore in the next review meeting on December 18.


“Bank sanction is already available in these projects, but there were some other issues (in getting various regulatory clearances). The issue came up before the finance minister as these are very important projects. We want to clear them because the money of our financial institutions is invested in these projects. If they don’t take off, that will give rise to non-performing assets,” Mittal said.


Mittal said the Foreign Investment Promotion Board had approved the Hinduja power project envisaging an investment of about Rs 6,000 crore, though L&T’s metro project (about Rs 16,000 crore) was still facing some legal obstacles. The highway project in Andhra Pradesh (about Rs 2,550 crore) was also held up over the environment clearance.


The government has started reviewing large projects after a meeting between Mukherjee and the industry on August 1, when industrialists expressed concerns. The finance minister is reviewing implementation of infrastructure projects valued Rs 100 crore and more.
Commerce and industry minister Anand Sharma, environment minister Jayanthi Natarajan and power minister Sushilkumar Shinde also attended the review meeting

Private infrastructure firms get nod for tax-free bonds

Source :FC : Sarita C Singh & KA Badarinath May 16 2010 , New Delhi

Private infrastructure companies can now easily access long-term and cost-effective funds with the governmentclearing the decks for them to raise money through tax-free bonds.

The route was cleared last week when finance minister Pranab Mukherjee approved the proposal to award tax-free status to bonds issued by private infrastructure companies and non-banking infrastructure finance companies, a finance ministry official said.

The decision will help companies to boost resources for public and private infrastructure projects, which were facing major financial constraints, the official said.

The official said all core sector companies and related non-banking financial companies (NBFCs) together would be able to raise only Rs 20,000 crore through tax-free paper.

They would have to follow stringent norms, the official said, and only AA plus rated pure infrastructure companies and related NBFCs would be eligible to issue tax-free bonds.

Infrastructure companies have welcomed the decision and some said it would reduce the cost of borrowing.

Srei Infrastructure chairman and managing director Hemant Kanoria said, “If that has happened, then it is a very good thing, because it was urgently required. It will help infrastructure finance companies to raise money in domestic market at lower cost and,

to that extent, we can also lend to private companies at a lower cost. Through tax-free bonds the cost of funds for infrastructure typically goes down by at least 200 basis points.”

Kuljit Singh, partner of audit and consultancy firm Ernst & Young in India, said it was a great move that would instantly lead to reduction in the cost of borrowing. However, one has to look into ratings, Singh said, as pension funds and even retail investors look for good ratings before investing.

L&T Power managing director and chief executive officer Ravi Uppal said it was a very good move and it would mobilise more earnings, which would come into the infrastructure segment.

“One of the things that is coming in way for infrastructure companies is investment, and if this kind of move is permitted, it will bring more earnings within the fold of the segment. Joint ventures, public-private partnerships and a whole lot of things will be triggered by this,” Uppal said.

GMR Energy chief executive officer Raaj Kumar said the move was positive but one had to read the fine print.

Jindal Power managing director R P Singh said it was great move for infrastructure sector as a whole.

On March 24, 2010, Mukherjee said that the government was considering opening up the window for issuing tax-free infrastructure bonds to private companies. So far, only state-owned Rural Electrification Corporation and National Highways Authority of India were allowed to issue such bonds.

Prime minister Manmohan Singh said last month that the investment needed for infrastructure sector was expected to grow to more than $1 trillion (Rs 45,00,000 crore) in the twelfth plan (2012-17) compared with $500 billion in the eleventh plan (2007-12).

To attract more funds for infrastructure development, the government allowed individuals to save more tax in budget 2010-11 by investing Rs 20,000 a year in long-term infrastructure bonds in addition to the Rs 1 lakh tax exemption under some sections.

New fund to facilitate Rs 45 lakh cr investment in infra

Source: PTI May 13 2010 , New Delhi

The government is likely to set up a fund to facilitate investment of over
Rs 45 lakh crore in the infrastructure sector during the 12th Plan (2012-17) and ensure an economic growth rate of about 9-10 per cent during the five-year period.

As part of the exercise to step up infrastructure sector funding, the government will also fix annual targets for ministries like road, railways, power and telecom, and would monitor implementation of the projects.

"In a bid to boost infrastructure development, besides setting annual targets, the government would make provision for periodically monitoring of such projects to ensure desirable growth of the sector," an official source said.

To be set up after procuring funding from multilateral lending agencies like the World Bank and the Asian Development Bank (ADB), financial institutions, insurance companies and pension funds, the dedicated fund would provide money to infrastructure sector projects with long-gestation periods.

The decision to set up an effective mechanism to ensure sustainable investment in infrastructure sector was taken at a meeting of the Planning Commission headed by its Deputy Chairman Montek Singh Ahluwalia yesterday.

During the meeting it was pointed out that infrastructure development in general and roads projects in particular, failed to take momentum in past 6-7 years despite maximum government efforts and after setting up of task force under Prime Minister Manmohan Singh in UPA-I.

"Of late, indications are that infrastructure is gaining momentum after the economy showed sign of recovery after global meltdown," it was also noted in the meeting. Ahluwalia had earlier said that 50 per cent of investment in the infrastructure development during the 12th Five-Year Plan would come from the private sector if the country is to realise an investment target of over USD one trillion (over Rs 45 lakh crore) in next Plan period.

During an infrastructure summit here, the Prime Minister had announced to double the investment target in infrastructure to USD one trillion in the 12th Plan compared to USD 500 billion in the current Plan.

Infrastructure bad loan norms eased

Source:fc: Rajendra Magan Palande Apr 01 2010

Relief to banks in delayed, litigated projects
The Reserve Bank of India (RBI) has relaxed the norms for classification of project
loans to infrastructure ventures as non-performing assets in case of delays for reasons beyond the control of the promoters.

Banks now have the leeway to not treat loans to infrastructure projects under litigation for four years from the original date of start of commercial operations. So far such treatment was allowed for only two years, RBI on Thursday said loans to these projects would be treated as standard loans for up to two more years.

Where projects are delayed for other reasons beyond the control of promoters, RBI has granted additional one year beyond the extension of the date of commencement of commercial operations.

The relaxations were made on the basis of bank representations. “It has been represented to us that there are occasions when the completion of projects is delayed for legal and other extraneous reasons like delays in government approvals, etc. All these factors, which are beyond the control of the promoters, may lead to delays in project implementation and involve restructuring/rescheduling of loans by banks,” RBI said.

The guidelines will not be applicable to restructuring of advances to developers of residential and commercial real estate projects and loans classified as capital market exposure.

For this purpose, RBI has also created two categories of project loans – those given to the infrastructure sector and to the non-infrastructure industrial sector. RBI said project loan would mean any term loan extended for the purpose of setting up an economic venture. Banks must fix a date of commencement of commercial operations at the time of loan sanction or financial closure in the case of multiple banking or consortium arrangements.

No further relaxation has been made in the other category of non-infrastructure industrial loans.

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RBI’s push for infrastructure financing

17 Mar 2010, 0259 hrs IST, DK Vasal & Gagan Sharma,
Source:ET
    
The finance minister has provided Rs 1,73,552 crore, constituting more than 46% of the total plan allocations for infrastructure development in
the country. And before the Budget, RBI took the mandate of ‘infrastructure push’ forward.

Based on the recommendation made in its second quarter review of the monetary policy, RBI classified Infrastructure Finance Companies (IFCs) as the fourth category among non-banking finance companies (NBFCs). It also laid down certain norms and eligibility criteria for qualifying as IFCs.

The basic requirements are a minimum net-owned fund of Rs 300 crore, and at least 75% of the total assets comprising loans and investments to infrastructure projects.

Soon after the Budget, RBI released appropriate regulations. On March 2, three circulars amending the external commercial borrowing (ECB) policy for facilitating development of the infrastructure sector and promotion of IFCs were issued. According to the Budget, companies can tap foreign funds for development of cold storage facilities.

Till now, the use of ECBs for on-lending was prohibited except for NBFCs exclusively engaged in financing the infrastructure sector. Since RBI has now introduced IFCs, the special dispensation for the NBFCs focusing on infrastructure has been taken back. Therefore, all NBFCs which propose to avail ECB for on-lending should get them categorised as IFCs. This creates incentives for such NBFCs.

It is noticed that financial institutions were going slow on infrastructure finance due to various characteristic difficulties with it, like long maturity, large fund commitment and high risks. One of the alternate methods of funding is the corporate bond market, but the bonds market in India is lacking liquidity and depth.

Hence, RBI has given a further push for domestic bonds and debenture issues by the infrastructure companies and IFCs. Now the credit enhancement facilities by non residents, which were available for the domestic structured obligations has now been extended to domestic debt raised through issue of capital market instrument like debentures and bonds by Indian companies engaged exclusively in the development of infrastructure and by the IFCs.

Now infrastructure companies and IFCs can take support of multilateral/regional financial institutions and government-owned development financial institutions like ADB, KFW, IMF for their bond issues. This could significantly increase the volume of bond issues by infrastructure companies and IFCs, as their debt issue will interest investors more due to support of these large foreign financial institutions.

These relaxations are not without restrictions. Identifying with RBI’s cautious approach, the restrictions are on minimum average maturity, prepayment, call/put options, guarantee fee and all in cost. With the relaxations and required restrictions, it is yet to be seen that how much interest these changes create among infrastructure players and whether these infrastructure entities will be able to garner support for their domestic debt issues from the particular foreign institutions.

Over the period of time, the government has tried various methods to improve funding of infrastructure sector like promotion of various development finance institutions like IDBI, IFCI, ICICI, PFC, IDFC and UIDF. But these institutions have not been able to support increasing infrastructure-financing requirements of the country. Therefore, there is a severe need for alternate sources for funding infrastructure projects.

The approach of the government, inter-alia, introduction of new category of NBFCs as IFCs appears to be another serious attempt of the government to promote infrastructure development.

The government has increased support to India Infrastructure Finance Company (IIFCL), which was started in 2006 primarily to provide long-term financial assistance to various viable infrastructure projects in the country. The FM announced that IIFCL’s disbursements are expected to touch Rs 9,000 crore by end March 2010 and reach around Rs 20,000 crore by March 2011.

Therefore, this current infrastructure financing push given by RBI will definitely support the financing requirements by increasing the financing options for the infrastructure entities like IIFCL.

(The authors are with DSK Legal. Views are personal.)