Attempts to develop alternative sources of financing (beyond commercial banks)


T.N.Arun Kumar | Executive Director, CARE Ratings Ltd, [Formerly CREDIT ANALYSIS & RESEARCH LTD.]

1. What has been the experience so far with attempts to develop alternative sources of financing (beyond commercial banks) – bonds, InvITs, IDFs, etc.?

The regulators have been encouraging development of bond market for two reasons – the banks were increasingly getting choked up and secondly as a means toderisk the banking system. Concrete measures to give a thrust to the bond market were suggested by the Khan Committee which were later adopted by RBI. The Large exposure framework of RBI and recent budget announcement to have 25% of incremental borrowings through bonds would help, though finer details on how this is going to be achieved are yet to be worked out. The promulgation of IBC is expected to be the major game changer as the bankruptcy law would aim towards enhancing the ‘recovery given default’ which would be boost to deepening of bond markets.

There were a few InvITs which hit the market but suffered from a perception gap – they were perceived as a product for capital gains (like equity shares) rather than an yield product. Only when the principle that it is an income product is clearly understood will we see InvITsactualy making a mark. Nevertheless, this is a tremendous tool for unlocking of capital for infra developers and would help in creation of new infrastructure in an efficient manner.

IDFs: There has been significant activity in the last couple of years of formation and institutionalization of IDFs. The product features are demonstrated to be able to support high quality assets at a relatively low cost of funds. However, this funding mechanism has been constrained by lack of suitable assets as well as sufficient interest from overseas funds.

2. Which sources hold the most promise given the Indian scenario?

In terms of gross volumes clearly we are seeing bonds holding the most promise. We do not see a large scale conversion as such from bank loans to bonds but given the tepid pace of bank credit growth (other than retail), incremental growth in debt market would be expected through bonds. With increasing size of mutual funds and insurance companies’ corpus, large investments are expected in the infrastructure space. In this respect, bond markets are expected to the provide the required long term funding matching investor class with the asset needs.

3. What are your views on “The Economic Times Infra Focus Summit” and how important do you to feel is the need of organizing such summits?

India is a developing country with large requirement of infrastructure investments. This summit is an important platform to bring out a meaningful dialogue among various participants in the system so as to understand the shortcomings and bring out solutions to such shortcomings. It is no doubt important for us to have such summits organized so that key stakeholders express their views which, if escalated to the policy makers, would be paving a way forward in a meaningful manner.

Satish Mandhana, Managing Director and Head of Investments, Eversource Capital.

  1. What has been the experience so far with attempts to develop alternative sources of financing (beyond commercial banks) – bonds, InvITs, IDFs, etc.?

Role of alternative source or financing beyond Private Equity / Infrastructure Equity Funds, Banks and NBFCs in Indian renewable energy space has been rather limited. Good part is that alternative sources such as Bonds, InvITs and IDFs have been tested but the size of the market addressed by them has been miniscule in comparison to total funding absorbed by the infrastructure sector. Primary reasons for slow uptake being absence of liquid corporate bond market, fragmented market with large number of small players who are unable to get investment grade rating for bonds or attract InvITs. Absence of credit enhancement mechanisms to improve rating of bonds is another major factor for slow take off. IDF’s are limited in numbers and are low on their capitalisation, thereby having very limited ability to make a difference, till they get capitalised to play a role.

  1. Which sources hold the most promise given the Indian scenario?

Green Bonds hold most promise given the keenness of Govt., Regulators and RBI to deepen Indian bond market, which will help tapping of Pension Funds corpse for long term money and potentially take-out bank funding.

  1. What are your views on “The Economic Times Infra Focus Summit” and how important do you to feel is the need of organizing such summits?

Infra Focus Summit from a credible source such as ET has its own merit. Not only it helps in focussing on relevant issues and offering solutions emerging in the summit, but it also offers an opportunity to get clarity on future needs and  aspirations to provide tangible inputs for policy planners and participants.

Mr Rohit Modi, Chief Executive Officer, Essel Infra & Smart Utilities, Essel Infra

  1. What growth potential do you see for ever-growing Infrastructure sector in India?

In one word, my response would be “Infinite”. At another level, the growth potential for Infrastructure in India is that of “Limitless Opportunities” for the resilient and the faithful, but “Unknown and full of pitfalls” for the weak-hearted and doubting Thomas(es)!

Let us accept one thing – we are a currently a Two Trillion Dollar economy giving us ~USD 1500 Per Capita Income for our 130+ Crores Population. This at a time, when most developed countries of the world have per capita incomes in excess of USD 30,000, if not more. In other words, our per Capita Incomes have to grow 20 times. Indian economy has to plan to be a 50 Trillion Dollar economy. It is for us to decide “When” and “How” we reach there. It will not happen in a hurry, unless we dramatically alter the pace and quantum of Infrastructure Investment, along with associated improvements in Health, Education & Embracement of Technology, which shall then determine the pace and timing of when we become 50 Trillion Dollar Economy.

2. What are the qualities you look for in your vendor/suppliers before choosing them for any project?

“Reliability, Dependability, Ability & Capability, Trust-worthiness and Integrity” would be the qualities that most of us would choose in our Partners, Employees and /or Vendors/Suppliers. Some would add beauty and glamour, and we can read it as “Attractiveness, Name & Fame, and/or Past Track Record”. Others may add “Value for Money”, or we can define as “Win-Win Partnerships”. Essentially we are looking for long-term relationships and All-Weather Friends!

3. What are your views on “The Economic Times Infra Focus Summit” and how important do you to feel is the need of organizing such summits?

I would have shortened the theme of this year’s summit as “Transition towards Futuristic and Resilient Infrastructure”, because for me we operate in a continuum. I believe the direction of the Journey is a given. The variables are Speed, Quantum and Composition, which in turn are shaped and affected in a large manner by Public Policy, ideological positions of the dominant players and External Macro-economic Environment.  Conferences like this provide useful pit-stops to take stock of ‘How’ we are doing, ‘Where’ are we going and ‘What’ needs to be attended to. At a time, when there is major push towards building the overall infrastructure of the country, the summit provides a much needed impetus to the sector by bringing in the best minds on one platform to discuss policy, strategy, challenges and much more. It is also a great forum for networking and building partnerships.

Mr M.K. Sinha, Managing Partner and Co-Head – India, Global Infrastructure Partners India LLP

  1. What has been the experience so far with attempts to develop alternative sources of financial (beyond commercial bank) – bonds, InvITs, IDFs, etc?

The natural pattern of financing infrastructure is construction financing to be provided by commercial banks and financial institutions based on an appraisal by a specialised project finance team. In India, unfortunately, commercial banks have limited specialised industry knowledge/skills and have therefore landed themselves into the current NPA trouble. Infrastructure Debt Funds are a good idea and should ideally be used for construction financing by commercial banks through specialised teams who can evaluate construction risk. However, it has not taken off because of multiple limitations in terms of ownership restriction and investment mandate that are prescriptive and focussed on post construction stage. After infrastructure projects have stabilized post commencement of commercial operations, the construction loan is ideally refinanced in a bond market through a public issuance as it is a de-risked product. Likewise, the equity can be monetised through InvITs framework. Bonds and InvITs that are meant to be substantially de-risked products and are ideal for investors with low risk, low return but long term hold investment pattern like Pension Funds, Provident Funds and Insurance Funds. Unfortunately, the investment mandate of such funds in India is regulated with very little allocation to these financial products. Therefore, the development of alternative source of these financing infrastructures have been limited.

2 .Which sources hold the most promise given the Indian scenario?

As mentioned above, Infrastructure Debt Fund mandate needs to expand to be a pooling vehicle for commercial bank providing construction financing loan infrastructure which are evaluated by specialised infrastructure professionals. Also regulation should be relaxed to allow Pension Funds, Provident Funds and Insurance Funds to invest in fully operational, de-risked and stabilised infrastructure assets with a high grade credit rating as it is another huge untapped potential source of financing. In terms of foreign capital, India provides one of the largest investment opportunities in yield oriented products for the global pension funds which are chasing yield. This pool of capital can be used to refinance infrastructure once it built and operational. We have seen the success to ToT in roads and we should try and replicate that model in other areas of infrastructure.

3. What are your views on “The Economic Times Infra Focus Summit” and how important do you to feel is the need of organizing such summits?

The Economic Times is a prominent business daily and well positioned to invite influential stake-holders to discusses issues around the infrastructure development through “The Economic Times Infra Focus Summit”. More importantly, it can propagate a gist of those discussions through press coverage. Hence, I would encourage The Economic Times to continue to organize such summits.

Mr Supratim Sarkar, Executive VP and Group Head, Infrastructure, SBI Capital Markets

  1. What has been the experience so far with attempts to develop alternative sources of financing (beyond commercial banks) – bonds, InvITs, IDFs, etc.?

Attempts have been made to develop alternative sources of financing beyond commercial banks; these being developing bonds markets, developing new structures – InvITs, IDFs.

Infrastructure Debt Funds (IDFs):

  • An IDF can be set up either as a trust or company. A trust-based IDF is a mutual fund that issues units to investors and is regulated by SEBI. Under the company-based format, the IDF is an NBFC that issues bonds to investors. So far, three infra debt funds have been set up through the NBFC route and three through the MF route.
  • India Infra Debt Limited, IDFC Infrastructure Finance Limited and L&T Infra Debt Fund
  • Total AUM of around Rs. 2,900 crore in June 2017
  • IDF-MF:
  • IIFCL, IL&FS and SREI: IDFs under the MF route (IIFCL, ILFS, SREI)
  • Total AUM of around Rs. 2,000 crore. 

Infrastructure Investment Trusts (InvITs):

  • Sponsor can raise funds by transferring assets to trust which would be managed by trustees
  • Till date 6 InvITs have been registered with SEBI, of which only 2 are listed with stock exchange. 
Sr. No. Name Reg. No. Validity
1 India Grid Trust (Listed) IN/InvIT/16-17/0005 Nov 28, 2016 – Perpetual
2 IRB InvIT Fund (Listed) IN/InvIT/15-16/0001 Mar 14, 2016 – Perpetual
3 GMR Infrastructure Investment Trust IN/InvIT/15-16/0002 Mar 17, 2016 – Perpetual
4 IL&FS Transportation Investment Trust IN/InvIT/16-17/0006 Dec 07, 2016 – Perpetual
5 MEP Infrastructure Investment Trust IN/InvIT/16-17/0003 Jun 16, 2016 – Perpetual
6 Reliance Infrastructure InvIT Fund IN/InvIT/16-17/0004 Nov 24, 2016 – Perpetual

Source: SEBI website 

  • Neither of the two aforementioned listed InvITs have managed to touch or cross their listing price of Rs 100 per unit. This has led to other companies putting their listing on hold.


Name Nature Description
Masala Bonds Indian Rupee denominated bond issued in offshore capital markets. ·  In FY-15, IFC committed Rs. 10 Bn investment in India and issued First Masala bond listed in London.

·  In FY-17, HDFC raised Rs. 30 Bn via unrated bonds sold to investors in Europe and Asia.

·  Other Masala Bonds: Adani Transmission ($400 Mn @9.10%), DHFL ($150 Mn @8.5%)

Green Bonds Specifically earmarked to be used for climate and environmental projects, typically asset-linked and backed by the issuer’s balance sheet. ·   In 2015, YES Bank issued first green bond of Rs. 10 Bn for financing the renewable and clean energy projects.

·   Other Green Bonds: IREDA (Rs. 19.5 Bn @7.125%), PFC ($400 Mn @ 3.75%) and IRFC ($500 Mn @3.835%).

·   NTPC Green Bond: Rs. 20 Bn @ 7.375% with a maturity of 5 years. Proceeds invested to support wind and solar projects.

Credit Enhancement Scheme Partial credit guarantee enhances the ratings of the project bond issue thereby enabling channelization of long term funds from investors like insurance companies, pension funds ·  ReNew Power raised Rs. 451 Crore and Hindustan Power projects raised Rs. 380 Crore for refinancing its existing debt under CE scheme provided jointly by IIFCL-ADB.

2. Which sources hold the most promise given the Indian scenario?

Infrastructure sector involves long gestation projects and thereby the exposure towards these projects remains for a very long time. Accordingly, both the financiers as well as the corporates focus on reducing the cost of such investments.

  1. i) IDFs offer easier financing at both SPV and hold-co level,
  2. ii) InvITs allows raising funds from multiple class of investors by transfer of multiple SPVs from promoters to the InvIT. InvITs provide for ease of raising funds, however this could restrict future IPOs as ownership of operating assets is transferred to the InvIT.

iii)                Bonds provide the flexibility of obtaining finer pricing based on credit rating of operating platform or at hold-co level.

Parameters IDFs InvITs Bonds
Ease of raising funds Operational projects with at least 1 year of operational performance. ·  Both operational and under construction projects could be clubbed under this structure

·  Cumulative project size >= Rs. 500 crore

·  Issue size >= Rs. 250 crore

Usually raised at Holding Company level based on past operational performance at Corporate level.
Cost of raising funds Lower RoI Yields, usually higher, in line with market Coupons, usually lower, in line with comparative rated debt security
Other Charges Processing charges

Rating Agency fees

Stock exchange listing charges

Merchant banks fees

Arranger fees

Rating Agency fees

Control dilution Nil Yes

Could impact future IPO plans, if any

Quantum of fund raising (market appetite) Limited, on account of risk appetite and size of IDF balance sheets Higher (depending on the valuation/ market sentiments) Higher, depending on rating of debt paper
Time frame for fund raising Lowest Highest Medium
Other requirements Mandatory Credit Rating Mandatory listing on stock exchange Mandatory Credit Rating

Hence, the end user needs to carefully consider the funding needs and value creation opportunities offered by each of the route.

Mr Shailesh Pathak, Chief Executive Officer, L&T Infrastructure Development Projects.

  1. What has been the PPP experience in urban infrastructure (successes, failures, learnings)?

L&T IDPL has developed marquee urban infrastructure PPP projects for over two decades.These include Bengaluru Airport, Hyderabad Metro, Vizag Water Supply project, Katupalli Port & Shipyard (near Chennai), Dhamra Port (near Cuttack), Coimbatore Bypass, and many office, commercial & residential projects in leading cities, such as Chandigarh’s landmark Elante Mall. All our projects in urban infrastructure have been state of the artin their respective fields at the time of its development and launch.

While every project developed by us is iconic and unique, all projects went through development risks, including delays in land availability, environmental clearances, midway change in scope, users fee issues, regulatory uncertainty, co-ordination with Union and State Government authorities for permits and approvals etc.  With our experience in mitigation and management of risks in developing projects, the three critical success factors would be (a) Government Support, (b) Availability of Land (c) Project Structuring and Bankability.

L&T IDPL looks forward to developing new age urban infrastructure projects, especially environmental friendly initiatives in urban infrastructure. Unlike earlier construction PPPs, there are large emerging opportunities in monetization of urban infrastructure assets on PPP, similar to the successful experience of TOT (Toll-Operate-Transfer) NHAI Highways that raised USD 1.5 bn of Foreign Direct Investment (FDI). Such PPP contracts for Operations and Maintenance of existing urban infrastructure assets would increase operational efficiency & citizen satisfaction, and attract large FDI in Urban Infrastructure sectors. How about monetising Delhi Metro System assets on PPP, with private sector operation, and redeploying the monetisation proceeds for fresh construction of public tranport in the city? There are numerous such examples.

2. What will be the impact of the new technologies like Block Chain, Artificial Intelligence, and Internet of Things in matching the pace of infrastructure supply to the forever increasing demand? 

Larsen & Toubro as a Group is committed to digitalisation. As CEO  & MD of L&T, Mr S N Subrahmanyan says, “The objective of digital transformation at L&T Construction is to utilize the power to new and emerging technology to make very significant improvement to our business.  We are committing significant investments of money and talent to this digital effort and the savings we expect to generate will be substantial, multiple times of investments that we make.” L&T construction sites, machines and equipments are fully IoT equipped and networked with sensors and receptors, for monitoring construction progress and cost control. AI is used to improve efficiency and utilisation levels for all projects.

L&T IDPL is leveraging AI, IoT and Blockchain wherever possible. Through sustained effort for ‘Less-Cash India’ Electronic Toll Collection (ETC) through RFID Tags or FASTags for NHAI highways has doubled over the last one year, and is currently at about 25% of overall collections. This would go up to above 50% in the next five years.  Over 4,00,000 vehicles pass through L&T IDPL’s 38 toll plazas across 8 Indian states. We are into Big Data analytics to study seasonal variations, user preferences and behaviour, and consequent impact on the toll revenue. The Company is presently evaluating block chain technologies for seamless procurement. Going digital is the key to our growth and development.

3. What are your views on “The Economic Times Infra Focus Summit” and how important do you to feel is the need of organizing such summits?

Having attended earlier editions of “The Economic Times Infra Focus Summit” I am quite appreciative of your efforts. India is going to become the 3rd largest economy in the world by 2030 (see my pinned tweet @shypk). As early as in the next 12 years, India shall overtake France, UK, Germany and Japan, with only USA and China ahead of us. This economic growth will necessarily require much more infrastructure, and in turn will lead to even more urban infrastructure. With PPPs for operational urban infrastructure assets, much more is possible for India’s 53 million-plus cities and other urban areas. Being the largest Indian financial newspaper, Economic Times deserves our compliments on putting together this 6th Infra Focus Summit.

Corporate Comm India(CCI Newswire)