Allow firms to invest in EL-rated infra projects: Govt to regulators

Regulators have now permitted investment in high-rated infra projects

The government has asked all financial regulators to relax investment norms for companies, enabling them to put money into large infrastructure (infra) projects rated ‘expected loss’ (EL). At present, regulators allow investments only in high-rated infra projects.

EL is a new rating scale which will factor in the probability of default and recovery prospects. It helps investors make a distinction between entities with strong fundamentals and recovery prospects and those without.

Earlier this week, the finance ministry’s Department of Economic Affairs met all financial regulators, including the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India (Irdai), bankers, and financial institutions, including State Bank of India and Life Insurance Corporation of India, along with top rating agencies, and discussed the viability of the EL rating system.

The talks on bringing in the EL concept comes in the wake of the Covid-19 pandemic. The government is focusing on infra projects, aiming to turn crisis into an opportunity. The move is intended to increase the participation from long-term investors and bond markets on account of higher credit risk and lower credit ratings for infra projects, said government sources. Some of the global economies have adopted it, added a source.  

The finance ministry also asked the top credit rating agencies to enable this framework for all the big operational infra projects based on the EL methodology.

EL is not a new concept. It was first introduced in the Union Budget 2016.  It did not take off in the absence of regulatory approvals. In January, Irdai approved the EL rating and directed insurers to classify investments issued by infra companies rated not less than ‘A’, along with an EL rating.

EL is assigned based on the expected loss to be incurred over the life of the debt instrument and includes the probability of default and post-default recoveries, said a rating agency executive. Its rating scale ranges from EL1 to EL7, with EL1 representing the lowest expected loss, EL7 the highest.

Explaining the rationale behind it, the executive said that the existing rating scale has limitations in providing adequate weight to important aspects of the infra projects, resulting in relatively lower ratings for them. To overcome these limitations and provide broader information on the associated risks to prospective investors, a new credit rating system for infra projects has been devised.

Given the financial stress on banks and cash-strapped infra companies, it is prudent to enhance the appetite for various risk buckets in the infra debt market and help in increasing the participation from long-term investors, said industry experts.  

“It’s a constructive move for insurance and pension companies that wish to invest in long assets like infra projects or special purpose vehicles. However, companies still require approval, based on their own investment policies wherein their investment committee and the board will decide the investment in each asset separately on a case-by-case basis,” said Ashvin Parekh, founder, Ashvin Parekh Advisory Services LLP.

The co-existence of conventional ratings, along with the EL scale ratings, will not only boost investor confidence in a capital-starved sector, but will also have the potential to open up avenues for investment flow into the infra sector, said another person present at the meeting.