 "First few issues will set the tone for InvITs")
In its latest bid to ease liquidity for infrastructure projects, the government has allowed infrastructure investment trusts or InvITs as an option to unlock value.
This is not the first time such an attempt is being made. However, most such options introduced since 2010 have met with limited success. Structural flaws, regulatory limitations and lack of a mature market have been the reasons for the limited fund raising seen so far.
Takeout financing, partially guarantee bonds and infrastructure debt funds are some of the instruments that were allowed in the past few years to improve liquidity. “Each of these schemes had their own share of teething problems, and have been picking up gradually. The issues vary depending on the scheme; further it has to be an attractive option financially for the infrastructure developer, the existing lender and the new financier,” said Anjan Ghosh, executive vice-president and chief rating officer, ICRA Ratings.
According to IIFCL website, about Rs 14,900 crore have been disbursed under the takeout financing scheme so far. “Takeout financing had its own set of issues, where the regulator wanted a lot of these institutions to work in a constraint kind of environment, including issues related to the termination clause,” said Sandeep Upadhyay, managing director and chief executive officer (CEO), Centrum Infrastructure Advisory.
Some of these instruments, like premium restructuring and takeout financing, have faced limitations in terms of lack of scope to implement. “Takeout financing involves the bank taking the initial risk may be for five years, and then passing it on to another bank or financial institution. One reason it may have not taken off is because a lot of road projects were stalled and may have not reached that stage,” said Madan Sabnavis, chief economist, CARE Ratings.
In all 13 proposals involving deferment of premium for a total value of Rs 7,019.50 crore have been approved till March 2015, according to NHAI’s 2014-2015 annual report.
“If the premium quoted earlier did not match with the revenue and cost involved in the project, which could have been the case from some developers, not much could be done through premium restructuring,” said a retired NHAI official who did not wish to be identified.
Will InvIT be able to make a mark? Industry experts believe its success may be subjective.
Upadhyay suggests InvITs could have a potential to garner $5 to $7 billion in the next few years. “As soon as the first two-three InvITs are successful, you will see more infrastructure companies opting for it. Within two months, those in the markets will have clarity on how they want to go ahead with these InvITs. Once these InvITs happen, there would be a breakthrough,” Upadhyay said.
“There needs to be more clarity on how one decides the fair market value for the assets that the developer will transfer to the trust in return of units. Also, an InvIT is permanent money sitting on one’s shoulder and one needs to get the structure right, need to have a long term perspective as it is a permanent model,” said Hemal Mehta, Deloitte Haskins & Sells LLP. InvITs are long-term yield-based investments comprising of long gestation period projects unlike other instruments with a finite lifetime.
Mehta added innovative financial products in India take longer to show success. “The Indian investor does not have a mature mindset… even mutual funds took a long time. Any financial product has taken five to ten years to normalise. This is surely an alternative capital raising instrument. What remains to be seen is how much can we market it to foreign investors,” Mehta added. The return that an InvIT offers to an investor will also determine the instrument’s success, he added.
On the debt side, options like 5/25 refinancing for infrastructure loans to provide for a longer tenure of loans to infrastructure projects also faced clarity issues. “5/25 refinancing again has not got much traction. The response from the regulator was also a mixed one over issues of maintaining the same net present value,” said Upadhyay.
This is not the first time such an attempt is being made. However, most such options introduced since 2010 have met with limited success. Structural flaws, regulatory limitations and lack of a mature market have been the reasons for the limited fund raising seen so far.
Takeout financing, partially guarantee bonds and infrastructure debt funds are some of the instruments that were allowed in the past few years to improve liquidity. “Each of these schemes had their own share of teething problems, and have been picking up gradually. The issues vary depending on the scheme; further it has to be an attractive option financially for the infrastructure developer, the existing lender and the new financier,” said Anjan Ghosh, executive vice-president and chief rating officer, ICRA Ratings.
According to IIFCL website, about Rs 14,900 crore have been disbursed under the takeout financing scheme so far. “Takeout financing had its own set of issues, where the regulator wanted a lot of these institutions to work in a constraint kind of environment, including issues related to the termination clause,” said Sandeep Upadhyay, managing director and chief executive officer (CEO), Centrum Infrastructure Advisory.
Some of these instruments, like premium restructuring and takeout financing, have faced limitations in terms of lack of scope to implement. “Takeout financing involves the bank taking the initial risk may be for five years, and then passing it on to another bank or financial institution. One reason it may have not taken off is because a lot of road projects were stalled and may have not reached that stage,” said Madan Sabnavis, chief economist, CARE Ratings.
In all 13 proposals involving deferment of premium for a total value of Rs 7,019.50 crore have been approved till March 2015, according to NHAI’s 2014-2015 annual report.
“If the premium quoted earlier did not match with the revenue and cost involved in the project, which could have been the case from some developers, not much could be done through premium restructuring,” said a retired NHAI official who did not wish to be identified.
Will InvIT be able to make a mark? Industry experts believe its success may be subjective.
Upadhyay suggests InvITs could have a potential to garner $5 to $7 billion in the next few years. “As soon as the first two-three InvITs are successful, you will see more infrastructure companies opting for it. Within two months, those in the markets will have clarity on how they want to go ahead with these InvITs. Once these InvITs happen, there would be a breakthrough,” Upadhyay said.
“There needs to be more clarity on how one decides the fair market value for the assets that the developer will transfer to the trust in return of units. Also, an InvIT is permanent money sitting on one’s shoulder and one needs to get the structure right, need to have a long term perspective as it is a permanent model,” said Hemal Mehta, Deloitte Haskins & Sells LLP. InvITs are long-term yield-based investments comprising of long gestation period projects unlike other instruments with a finite lifetime.
Mehta added innovative financial products in India take longer to show success. “The Indian investor does not have a mature mindset… even mutual funds took a long time. Any financial product has taken five to ten years to normalise. This is surely an alternative capital raising instrument. What remains to be seen is how much can we market it to foreign investors,” Mehta added. The return that an InvIT offers to an investor will also determine the instrument’s success, he added.
On the debt side, options like 5/25 refinancing for infrastructure loans to provide for a longer tenure of loans to infrastructure projects also faced clarity issues. “5/25 refinancing again has not got much traction. The response from the regulator was also a mixed one over issues of maintaining the same net present value,” said Upadhyay.
