While looking to diversify from financial leasing for the Railways to lending to other entities having forward and backward integration with the transport giant, the Indian Railway Finance Corporation (IRFC) is looking to strengthen its project evaluation methodology. It is aware of the challenges that come with project lending and will “cautiously lend” so that its credit rating is maintained, said SK Pattanayak, Managing Director, IRFC, in an interview to BusinessLine . Excerpts:

Recently, the Corporate Affairs Ministry made an exception which has cut the tax liability of IRFC. What exactly does the ₹6,300-crore cumulative benefit translate into?

It will add to our net worth, improve our debt-equity ratio, will allow us to raise more debt funds without any extra equity support from the Ministry of Railways. With this, we can raise an additional amount of ₹63,000 crore (approx) from the market without any infusion of additional equity. Our outstanding borrowing as on March 31, 2017 was ₹1.02 lakh crore.

Hitherto, our financial statements had total tax provision of 56 per cent — Minimum Alternate Tax (MAT) of 21 per cent and Deferred Tax Liability of 35 per cent. While MAT entails actual cash outgo, DTL is only a provision in the books. With the exemption from DTL, the company wouldn’t be making the mandatory provision of 35 per cent which would result in a corresponding increase in the PAT. Higher PAT will result in higher dividend payout to the shareholder and higher accretion to ‘Reserves and Surplus’.

At present, we have been paying dividend at 40 per cent of our PAT. So, with the increase in PAT on account of savings due to the notification, dividend to the shareholder would be higher. Since we are a 100 per cent government-owned company, our dividend goes to the Consolidated Fund of India (CFI).

Wasn’t that the case earlier?

Well, the case was same earlier also. We used to give dividend to the Railways and the Railways, in turn, to the Centre. Now, since the Railway Budget has been merged with the Union Budget, the dividend cheque will be directly in the name of Ministry of Finance.

How would your nature of business change?

Till now, IRFC’s prime focus has been to finance the Extra-Budgetary Resources (EBR) requirement of the Railways. IRFC will continue to remain strategically important to the growth of the Railways and will play a pivotal role in its capital formation.

However, we are planning to diversify by selectively funding projects which have forward and backward linkages with the Railways. Accordingly, the object clause of IRFC’s MOA has been amended and also approved by MoR.

Besides, a reputed consultant has been appointed by us to formulate our business plan and identify potential areas for business diversification. IRFC is also exploring to augment its manpower with skill-sets in the areas of project financing, project monitoring, etc.

As you diversify, what are the strengths that you are looking at adding?

We have to improve our project evaluation capabilities with induction of new skillsets as we diversify to lending. Initially, we may explore partnerships with other lending institutions like India Infrastructure Finance Corporation Limited, big banks and IFCs. We are also open to consortium lending.

As you look at infrastructure lending, what kind of tenures will you be lending for? Also, given that infrastructure projects are known to have challenges, how will you deal with them?

Infrastructure lending generally involves longer tenors. Our lease agreements with the MoR are for 15-year tenors. We are open to lend for longer tenors of up to 30 years on a case-to-case basis also. However, we would need to address the issue of Asset– Liability Mismatch in our books before committing any funds for longer tenors.

In relation to the challenges involved in infrastructure lending, we will be selective and will lend only after carrying out detailed due-diligence. We will always be ensuring that our credit rating does not get affected with our foray into diversification.

IRFC’s IPO has been talked about for a long time. When can we expect that?

Our Draft Red Herring Prospectus was held up because of the deferred tax liability issue. Now, we are in the process of finalising the Draft Red Herring Prospectus (DRHP) after incorporating the impact of the issued notification in our financials. DRHP is expected to be filed with the SEBI at the earliest, in this fiscal itself.

Regarding the timing of the IPO, a final call will be taken by the Department of Investment and Public Asset Management. The Centre has approved additional public offer of 10 per cent by IRFC, besides offer for sale by the Centre to the extent of 5 per cent.

You spoke of an IPO, and you lend to he Railways with a margin of 50 bps. What will happen to your margins as you look to diversify? Will the margins for other newer areas of lending be the same?

We charge 50 bps to MoR, while other NBFCs operate with a margin of 250-300 bps. For other projects, we cannot give such attractive rates. Obviously, infrastructure lending has associated risks and accordingly the returns expected would be higher to justify the risks.

How much have you been able to raise through 54 EC?

We are hoping to raise up to ₹500 crore through 54 EC till March 31 as we got the notification in mid-year only, when people had already parked their funds. And also we are a new entrant in this market wherein NHAI, REC are identified major players with 54 EC. Now, with the long-term capital gain tax coming in, we expect more mobilisation of funds through this route in future years.

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