Road laid to draw foreign funds to infrastructure

The 2011-12 Budget proposal has paved the way for the fund-strapped infrastructure sector to receive large-scale financing, especially from foreign institutional investors (FIIs).

The added tax sops on notified infrastructure debt funds would ensure that the cost of floating such funds is not too high.

The five-fold increase in the FII limit in corporate bonds issued by infrastructure companies with residual maturity of over five can to a significant extent bridge the funding gap that infrastructure companies are currently facing.

The increased limit would also improve market depth, encouraging more players to invest.

Bridging the gap

Consider the current XI Five-Year Plan that ends in FY12. The Finance Ministry had in 2010 stated that the total requirement of debt by public and private sectors for financing infrastructure in the current plan was likely to be $247 billion, against the $206 billion. The deficit amounts to Rs 1,84,500 crore. This can, to a large extent be met by the $25 billion (Rs 1,12,500 crore) FII limit now proposed.

Similarly, a funding gap of Rs 12.3 lakh crore is estimated for the XII Plan (2012-2017). Clearly, enhancing the FII limit would to a large extent help meet the gap.

Interestingly, the proposal has also addressed practical constraints relating to the issue of such bonds.

As most infrastructure projects relating to airport, power or roads developed by the likes of GMR Infrastructure or IRB Infrastructure Developers are floated as special purpose vehicles (SPVs), these offshoots often look to their parent companies to fund them. The proposal allows FIIs to invest in unlisted bonds with a three-year minimum lock-in; the same being tradable among themselves during such lock-in.

Large greenfield airport and power projects could significantly benefit from this move.

Players such as Tata Power, Adani Power and NTPC, who have good credit standing in the power space, and SPV operators such as IRB, GMR and GVK Power and Infrastructure — who hold assets that generate cash — may be companies that would benefit from the moves.

The second proposal of creating notified vehicles in the form of infrastructure debt funds, too, is clearly aimed at wooing foreign funds.

While it is unclear as to whether corporates would directly float such debt funds, the proposition appears attractive on the tax aspect, both for the borrower and the investor. The income-tax exemption offered for such funds could well make these funds more attractive for the borrower.

While currently external commercial borrowing rates are attractive enough for infrastructure companies to tap this route, with the income-tax exemption thrown in and with a possibly longer timeframe, the proposed debt funds could become a viable source of funding.

To attract investors, the proposal allows for a mere 5 per cent of tax to be withheld at the time of payment of interest, instead of 20 per cent at present. This clearly is aimed at attracting foreign investors, who would be keen to receive as much cash on hand as possible.

We believe large infrastructure companies could come up with suitable models to take advantage of this funding route.

On the indirect tax front, companies such as IVRCL Infrastructures and Projects and those like Gammon India would benefit from the customs duty exemption on tunnel boring equipment. These companies own a large portfolio of equipment, and a good number of them are imported.

A comprehensive policy for public private partnerships, direct support for Metro rail projects and 48.5 per cent of planned gross budgetary support going in to infrastructure speak of the emphasis given to the sector.

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