A Chinese development company has built a 57-story tower in a record 19 days in Changsha, Hunan Province in China. The construction of the new skyscraper of concrete and glass in the central part of the country is an infrastructural marvel. In New Delhi, despite non-stop work during the peak lock-down days of Corona, India is thinking of extending the Central Vista project’s construction period by a year. The comparison reveals the preparedness and priorities of the two giants of Asia.
As the third biggest global economy, on the PPP ( purchasing power parity basis) with a GDP of US$ 10.21 trillion in the current year. The nominal GDP presently is US$ 3.05 trillion making it the 5th largest economy in the world. The average annual GDP growth over the five years (2016-2020) was 6.7%. In 2021 the economy grew by 9.5% (IMF). And for 2022 is 8.5% placing India as the fastest-growing economy of significant size in the world. But we are streets behind in infrastructure development as compared to our peers.
India spends 4% of its $ 3.05 trillion GDP on Infrastructure. China also spends 4% of its GDP on Infrastructure. The GDP of China is $15.60 trillion. In the long-term, the China GDP will trend around $16.70 trillion in 2022 and $17.40 trillion in 2023. At the same time, India might not achieve a $ 5.0 trillion economy in 2027 due to pandemic disruptions. China’s average infrastructure spending as a percentage of GDP is is ten times higher than the United States.
The National Bureau of Statistics reveals that China spent about $8 trillion on infrastructure investment in 2020. With a GDP of $23.20 trillion, the U.S. spent $146 billion in federal money over the same period. Therefore, it is clear that China may be number one globally by the year 2030. Financial muscle strengthens military strength. To counter the might of China, India has to invest heavily in Infrastructure.
The infrastructure sector encompasses power generation, roads, airports, railways, water systems, telecommunications, and public utilities, which support overall economic growth. Infrastructure impetus cascades growth by providing mobility and enhanced connectivity, and logistics such as road/rail infrastructure generate employment and revive capital-intensive industries. The Indian Government has initiated dedicated investment in the infrastructure sector.
In the previous year’s Budget, capital expenditure of R.S. 5.54 lakh crores (US$ 74.37 billion) compared to Rs.4.39 lakh (US$ 58.93 billion) crores has been proposed. The National Infrastructure Pipeline (NIP) expanded from 6,835 projects to 7,400 projects. Out of this, 217 projects worth Rs.1.10 lakh crores (US$ 14.77 billion) stand completed. A stretch of 13,000 km length of roads, at the cost of Rs. 3.3 lakh crores (US$ 44.30 billion) have been awarded under the INR 5.35 lakh crores (US$ 71.82 billion) Bharatmala project, of which 3,800 km stand constructed.
The estimated Infrastructure investment budget is over USD 1.5 trillion in the next five years. Apart from investing in Roads and Highways, Railways, Ports, and Airports, the Power sector focuses on Solar Energy. It strategically reassesses coal-based thermal plants to reduce carbon footprints as part of support to climate change initiatives.
A robust framework to attract funds and expertise is the need of the hour. 100% Foreign investment is permissible in most sectors under the automatic route, presenting exciting opportunities for global infra companies and investors. The emphasis, therefore, should be on Foreign Direct Investment (FDI) and Public-Private Partnership (PPP) models to drive investments and execution.
The Ministry of Finance has proposed setting up a new Development Financial Institution (DFI) – The National Bank for Infrastructure & Development to provide a long-term holistic approach to stimulate infra investments. Bank loans are already the primary funding source for infrastructure projects in China. Commercial banks hold around 80 percent of total infrastructure loan portfolios, and bank financing accounts for more than half of total infrastructure financing.
Though well-capitalized, the Indian banking system needs fresh capital of $70 billion to support India’s ambition to become a $5-trillion economy. The banks continue to stay attractive for investors to raise additional tier-I (AT1) capital at a reasonable cost. The corporate lending landscape is heading south. Corporations have refinanced bank loans of almost Rs 2 lakh crore by tapping the stock markets, leaving banks with surplus liquidity. Bank credit has, therefore, huge space for growth in India. The bank credit to GDP ratio is around 56%, while the corporate debt to GDP ratio is about 90%. In economies like the U.S., the private debt to GDP ratio is 200%. So there is considerable scope for raising debt from banks by corporates in the Infrastructure business activities.
While banks are responsible for Infrastructure, there is a need to popularise ‘Takeout Financing’ through national infrastructure banks and alternative investment funds like infrastructure investment trusts (InVITs). In Takeout Financing, new lenders take over project loans of existing lenders, stretching the loan’s repayment over a more extended period. A Takeout exposure is a method of financing whereby a loan replaces the initial loan. Takeout financing is long-term where bank promises to provide funding at a particular date in an ongoing long-term project. RBI permits takeout financing for the infrastructure sector.
Takeout financing provides finance for longer-duration projects of about 15 years by banks sanctioning medium-term loans for 5-7 years. The financing bank sheds the loan out of the books within a pre-determined period to another Bank to avoid the asset-liability mismatches. Banks do not accept deposits for more than ten years and do not have adequate resources to create long-term assets. Take Out loans were introduced to convert this dilemma into opportunity to attract banks to the infrastructure sector for the initial few years and then come out.
InvITs are evolving as a popular tool for Takeout Financing as investors, whether Banks, Companies, or Individuals, can come in and go out of InVITs after a stipulated minimum period. It is suitable for long-term financing/refinancing infrastructure projects as per the SEBI (Infrastructure Investment Trusts) Regulations, 2014. The investors board or unload during the project’s currency.
InvITs are Trusts, and the instrument of Trust is in the form of a deed registered in India under the Registration Act, 1908. SEBI monitors InVITs trusts. It has parties such as Trustee, Sponsors, Investment Manager, and Project Manager. The trustee of an InvIT is essentially a SEBI registered debenture trustee who is not an associate of the Sponsor/Manager. Each sponsor to have a net worth of not less than Rs.100 crore if the sponsor is a company; or net tangible assets of value not less than Rs. 100 crore in case the sponsor is an LLP. An InvIT shall hold a controlling interest of 51% of the equity share capital or interest in the underlying SPV, which completes the infrastructure project.
Sponsors of an InvIT, collectively, hold not less than 15% of the stake in the total units of the InvIT on a post-issue basis for a period of at least three years. Any holding by a sponsor exceeding 15% on a post-issue basis retained for at least one year. The stake of an InvIT in the underlying assets shall be not less than INR 500 crore, and the offered size of the InvIT shall not be less than INR 250 crores at the IPO.
The aggregate consolidated borrowings of the InvIT and the underlying SPVs, net of cash and cash equivalents, shall not exceed 70% of the value of InvIT assets. For borrowing by InvITs, net of cash and cash equivalents, InvIT must seek approval of the prescibed unitholders. It has to obtain a Credit rating from a credit rating agency registered with SEBI. AAA or equivalent of consolidated debt and project debt.
The InVIT must utilize funds only to acquire or develop infrastructure projects. In the case of PPP projects, the InvIT shall mandatorily invest in the infrastructure project through holding company and SPV. Listing is mandatory for both publicly offered and privately placed units of InvITs, who shall disclose in terms of the listing agreement. InvIT is mandatorily required to list on the recognized stock exchange within 12 days from the date of closure of the Initial Public Offer. The trading lot for the trading of units on the stock exchange shall consist of 100 units.
The minimum subscription from any investor in the above ways shall be Rs. One Lakh. The InvIT shall redeem units only by way of a buy-back or at the time of delisting units. The SPV shall distribute 90% of its net distributable cash flows to the InvIT in the proportion of InvIT holding in the SPV subject to applicable provisions of the Companies Act, 2013 or Limited Liability Partnership Act, 2008. The InvIT shall distribute not less than 90% of its net distributable cash flows to the Unit Holders.
The business acquaintances dealt as per the accounting standards at arm’s length basis to safeguard the interest of the unitholders, consistent with the strategy and investment objectives of the InvIT.
The investment manager shall apply for delisting of units of InvIT to the Board and the designated stock exchanges if no projects are remaining under the InvIT for a period exceeding six months and InvIT does not propose to invest in any project in the future.
As per SEBI (Infrastructure Investment Trusts) (Amendment) Regulations, 2019, a different framework for privately placed unlisted InvIT is available to raise funds and investments. The framework relaxes the minimum number of investors, i.e., 20, and increases the minimum investment limit to Rs. 1.0 crore but only from Institutional investors and body corporates.
With banks bleeding with liquidity over the crying needs of Infrastructure for funding, RBI should make it mandatory for all banks operating on its soil to finance 20% of its investible funds in Infrastructure. By moderating SLR investments, RBI can incentivize Banks if they finance Infrastructure projects through Take-Out Financing through InVITs.
-Hargovind Sachdev
hargovindsachdev@gmail.com
About Author
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occupied senior positions in UCO Bank, United Bank of India,State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt,Germany from 2006 to 2011 covering 15 countries of Central Europe.Has undergone International Banking Training from Asian Institute of Management, Manila, Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange,Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit,Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner , Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker hav-ing conducted multiple Motivational Seminars for institutions like ONGC, National Housing Bank & Bank of Baroda. He is an Inde-pendent Director & consultant to various big entities in corporate sector at present.
