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Bonds Financing in Infrastructure Sector

  • With funding from commercial banks drying up, infrastructure companies are increasingly turning towards alternative ways of raising money. In this context, the role of bond financing has gained significant importance in the last couple of years, although its contribution to infrastructure financing continues to remain limited.

  • To its credit, the Reserve Bank of India (RBI) has certainly come up with a number of enabling policy  measures to deepen the bond market.

  • Foreign portfolio investors have been allowed to directly access Indian corporate bond and G-sec markets. The limit for partial credit enhancement has been increased from 20 per cent to 50 per cent of the bond issue size. Limitations have been imposed on the loan exposure that banks can provide to individual companies. ISIN maturities have been capped at 12 per year to improve the liquidity in the secondary market.

  • Most recent issuances have been from the renewable energy, power transmission, telecom and road sectors. The average tenure for infrastructure specific issues has also been higher at 11-12 years than the overall private sector tenure of 5-6 years.

  • Meanwhile, masala bonds have seen limited traction so far. Some of the key issuances were by the Indian Renewable Energy Development Agency (IREDA), the National Highways Authority of India (NHAI), NTPC Limited, Sembcorp, ReNew Power, etc. In order to stimulate activity, the RBI, in September 2017, removed masala bonds from the corporate bond investment limit. These bonds are now being treated as external commercial borrowings, where a borrower just needs to seek the RBI’s approval to sell these securities.

  • The market for green bondslooks promising. The RBI plans to come out with green bond guidelines and is preparing a framework for enabling issuance of these bonds in large numbers. Several companies such as Power Finance Corporation (PFC) Limited, Rural Electrification Corporation (REC) Limited, Indian Railway Finance Corporation (IRFC), Greenko, Azure Power, L&T Infrastructure Finance, etc., issued such bonds in 2017.

  • While recent developments in the bond market bode well, long pending issues and challenges need to be resolved. One of the biggest challenges is credit rating requirement, as cash-rich pension funds and insurers only invest in assets with a credit rating of AA or above. Since most infrastructure projects are implemented through special purpose vehicles (SPVs), the latter are unable to secure a credit rating of AA or higher at the pre-commissioning stage. Moreover, the level and complexity of stamp duty does not encourage the development of the bond market.

  • Additionally, the corporate bond market is largely a private placement driven one. Public issues are difficult, expensive, and inflexible, with the issue process taking several months, compared to other markets where the process takes a few days.

  • The mission of this conference is to highlight the recent trends and developments in bond market, discuss new policy initiatives and examine the challenges and way forward.

Real Estate Investment Trusts (REITs) and Infrastructure Investment trusts (InvITs)

  • Real Estate Investment Trusts (REITs) and Infrastructure Investment trusts (InvITs) market has finally moved forward with two companies launching InvITs in 2017. REITS, on the other hand, are yet to take off.

  • In May 2017, 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 by 8.57 times raising about Rs 50 billion. In the power sector, India Grid Trust, sponsored by Sterlite Power Grid Ventures Limited, raised Rs 22.5 billion.

  • Recently, Reliance Infrastructure InvIT Fund has also got the final nod from SEBI to float its IPO. Other companies such as IL&FS Transportation Limited, Larsen and Toubro and MEP Infrastructure Developers are also planning to list their assets under this instrument.

  • While various regulatory amendments have been made in the past with the objective of making REITS and InvITs more attractive for raising capital, both the listed InvITs received lukewarm response from investors and are currently trading below their issue price.

  • Some of the key amendments included allowing InvITs to raise funds through debt securities, exempting InvITs from the ambit of acceptance of deposit rules under the Companies (Acceptance of Deposits) Rules, 2014, permitting banks to invest up to 10 per cent of the unit capital of InvITs and according approval to mutual funds for investing in these instruments.

  • For REITS in particular, the challenges are many. Developers are still not able to distinguish fully between a REIT and lease rental discounting (LRD) which are typically available in the range of 9-11 per cent for reputed developers. They therefore may like to defer full monetization offered by a REIT structure until the expiry of the LRD. Moreover, REITs unlike InvITs, cannot raise funds on a private placement basis, and have to make a public offering. Taxation issues with respect to REITs are also not fully sorted out which continue to act as a deterrent for domestic investors.

  • As things stand today, it is best for investors to adopt a wait and watch approach for these products to better understand the risk-return profile, given the quasi equity nature of these instruments. It should be understood that both REITs/InvITs are attractive on a risk-adjusted basis and are better suited to longer term, patient capital.

  • Going forward, participation from investors is also expected to increase once the maiden InvITs make their first dividend payments to unitholders. 

  • Meanwhile, globally these products have done well, especially in countries like Singapore. Indian InvITs are in fact more tax-efficient as compared to its global peers as they are exempt from dividend distribution tax on dividend payouts. 

  • It is hoped that in the long run REITS/InvITs will help real estate and infrastructure players to unlock value in the assets they own and release the much needed capital for further expansion.

  • The mission of this conference is to discuss the progress and policy amendments for these structures, examine the challenges being faced and discuss the future potential and prospects.
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