Infrastructure sectors in the country face critical financing issues in terms of the high cost of capital, challenges in obtaining non-recourse funding and dearth of long-term funding sources due to the asset-liability mismatch. Given the unprecedented stress levels in the banking sector on account of non-performing assets (NPAs), the infrastructure financing market is at an inflection point seeking alternative sources of funding such as infrastructure investment trusts (InvITs) and infrastructure development funds (IDFs).
InvITs – A potential game changer
In India, InvITs were first proposed in Union Budget 2013-14. It is a trust that manages income generating infrastructure assets, typically offering investors a regular yield and a liquid method of investing in infrastructure projects. It is like a mutual fund that enables investment in the sector by pooling small sums of money from a multitude of investors for investing directly in infrastructure projects. The sponsor can raise funds by transferring assets to the trust, which would be managed by trustees and where other institutional investors can invest, thereby unlocking the tied-up capital of developers.
With the objective of making InvITs more attractive for raising capital, various regulatory amendments governing this instrument have been made recently. In September 2017, the Securities and Exchange Board of India (SEBI) allowed InvITs to raise funds through debt securities. Further, in May 2017, the Ministry of Corporate Affairs exempted InvITs from the ambit of “acceptance of deposit” rules under the Companies (Acceptance of Deposits) Rules, 2014, a move that is expected to ease compliance requirements for the investment vehicle. In order to get more investors interested in InvITs, the Reserve Bank of India (RBI) permitted banks to invest in up to 10 per cent of the unit capital of InvITs and SEBI accorded approval to mutual funds for investing in these investment trusts.
In May 2017, the IRB InvIT Fund, sponsored by road developer IRB Infrastructure Developers Limited, became the first InvIT to be listed on the stock exchange and was oversubscribed 8.57 times raising over Rs 50 billion. In the power sector, the India Grid Trust, sponsored by Sterlite Power Grid Ventures Limited, raised Rs 22.5 billion. The issue witnessed a lukewarm response from various investor classes receiving an oversubscription of only 1.35 times. However, both the trusts debuted at a discount on the bourses reflecting investor diffidence towards the new financial instrument.
Meanwhile, the Reliance Infrastructure InvIT Fund has also received the final nod from SEBI to float its initial public offering. The proposed issue size is Rs 25 billion, with an option to retain oversubscription of up to 25 per cent of the issue size. Buoyed by these developments, companies like IL&FS Transportation Limited, Larsen & Toubro (L&T) and MEP Infrastructure Developers are also planning to list their assets under this instrument.
IDFs – Few takers
Announced in Union Budget 2011-12, IDFs are investment vehicles which can be sponsored by commercial banks and non-banking financial companies (NBFCs) in which domestic/offshore institutional investors, especially insurance and pension funds, can invest through units and bonds issued by IDFs. As per regulations, they can be created either in the form of a mutual fund (MF) or an NBFC. Despite the ability of IDFs to refinance non-tripartite agreement-backed projects and a wider gamut of projects able to tap the route, not much activity has been witnessed in this space. The lukewarm response it has received so far has been discouraging.
As of March 2017, three IDF-NBFCs – L&T IDF, Infrastructure Development Finance Company (IDFC) IDF and ICICI Bank-backed India Infra Debt – are currently active and have a combined asset base of Rs 90 billion, while the asset base of IDFs under the mutual fund route (India Infrastructure Finance Company Limited, Infrastructure Leasing & Financial Services and Srei Infrastructure Finance Limited) stood at Rs 20 billion. Recently, in April, Kotak Mahindra Bank received RBI’s nod to launch its IDF-NBFC. One of the key advantages of IDF-NBFCs that has helped draw investors is that they are allowed to invest only in infrastructure projects that have successfully completed one year of commercial operation. Hence, they do not involve any construction risks. However, these funds are still minuscule in the larger context of banks’ lending exposure to infrastructure.
The way forward
Since their launch, IDFs have failed to attract investors due to a number of impeding factors such as procedural issues, illiquid nature, pricing risks, and overregulation. Structuring issues continue to prevail in IDFs in general and IDFs-MFs in particular. The biggest hindrance to the instrument’s take off is that banks are unwilling to relinquish operational projects in a weak credit growth scenario. However, it may be hoped that further easing of policy guidelines can revive some interest in this space.
In the long run, InvITs will help infrastructure players unlock value in the assets they own and release the much-needed capital for further expansion. However, in the short run, given the quasi-equity nature of this instrument, both investors and infrastructure firms have adopted a wait-and-watch approach and its success will depend on the yields established.