It is imperative that we understand that the much-needed boost in investment in infrastructure finance can be met by international funding.

India is on the cusp of a growth boom, as indicated by recent growth estimates that peg the 2014-15 GDP at 7.4% and many expecting the 2015-16 GDP to breach the 8% mark. With such growth in the offing, it is imperative that India look at large investments in infrastructure to plug the supply bottlenecks.

A study by CRISIL and industry body PHD Chamber of Commerce and Industry estimates India's infrastructure needs over the next five years at INR 26 crore lakh to meet the 7-8% growth projections. With this amount close to 30% of current bank deposit levels, it is imperative that India looks beyond its borders to attract overseas funds.

Wary banks
The primary lenders i.e. commercial banks, have grown wary of lending to infrastructure following the rise in bad loans and asset-liability mismatch issues, infrastructure finance companies have been facing asset quality stress, infrastructure debt funds are at early stage of growth and the corporate bond market remains at a nascent stage.

Government has taken a number of initiatives to facilitate reengineering the finances for Indian corporates such as letting the banks extend 25-year loans for infrastructure, with permission to refinance these loans every 5-7 years  and allowing banks to issue long-term bonds that are exempt from reserve requirements, specifically aimed at funding infrastructure projects

Government initiatives

Recognizing the need to the complement the boost to domestic banks with foreign aid, the Government and RBI have taken various steps to ease the flow of capital into the country

In recent steps, the government has eased foreign investment for the construction sector with rules simplified for investors to enter the market, sell or transfer assets and repatriate project proceeds. The minimum capital requirement has been cut to $5 million from $10 million earlier. Recent norm changes allow core-investment companies to raise foreign funds for special purpose vehicles. Other regulatory changes include a broadened definition for infrastructure, and ECB proceeds usage for domestic loan repayment. ECB commercial borrowers can also place such proceeds in term deposits ahead of utilisation, and RBI has also allowed large NBFCs to raise ECB to finance infrastructure equipment imports.

In addition to direct inducements to foreign capital, government has taken up a number of new initiatives that boost the investor confidence.Initiatives such as streamlining the process for government clearance, introduction of the National Building Code-2015 (that will be finalised by September 2015)to enablea single window clearance for construction projects would facilitate better structuring of projects and would thus boost confidence of the international lenders. 

Finance from Multilaterals: possible with right structuring

In November 2014, the World Bank's finance arm IFC raised INR 10 billion via offshore rupee bonds, which it invested in Axis Bank's infrastructure bonds. Thus, the multilateral agency was able to tap the infrastructure project potential in India. As of June 30, 2014, IFC's committed portfolio in India stood at $4.7 billion, making India IFC's largest portfolio exposure.

Similarly, Asian Development Bank, Japan International Co-operation Agency and Multilateral Investment Guarantee Agency have also been selectively tying up with companies, or state governments or local lenders to invest in the infrastructure space in India.Starting 2014, Asian Development Bank has indicated that it will provide $7-9 billion over three years.ADB had approved 210 loans amounting to $31.5 billion, $173.8 million for 10 grants, and $262 million for 348 technical assistance projects in India as of December 31, 2013.

Many Indian companies believe that the high regulatory requirements, human rights norms, equator principles, and other issues such as land acquisition and habilitation, tend to be the topics that these multilateral agencies have a tough due diligence on. This makes it a long-winded process for Indian companies to source funds from such agencies. So despite being long-tenure and subsidised funds, raising finance from these agencies is not perceived as a first option for Indian projects.

However, the right kind of structuring and right risk mitigations mechanism would surely bring home the benefits for cheap money in a very efficient manner.

Overseas funding - bonds
Another source of funds can be bonds denominated in US dollar, Chinese renminbi or other foreign currencies but such avenues have so far been tested only by top Indian companies owing to strict regulations and shallow hedge market

In 2011, the RBI had allowed Indian companies to bring in Chinese Yuan-denominated external commercial borrowings within the overall cap of $1 billion.IDBI was the first Indian company to borrow in Chinese yuan, through CNH Bonds in November 2011. This was followed by ICICI and the IL&FS group. IL&FS has tapped the CNH Bond market twice, in April 2012 and July 2014.

In the recent past, easy global liquidity conditions and a strong demand for India paper has enabled many Indian companies to raise capital from overseas bond markets to meet infrastructure needs. Many companies have raised them through arms in overseas territories, which helped them avoid some of the stricter regulatory norms. The popularity of India as an investment destination has also enabled pricing of such issuances at 4-10% (pre-hedge), rather than the traditional pricing for loans at 12-15% to such companies in India.

In 2014, offshore issuances by Indian firms touched a record high of $18.6 billion, and is expected to cross $20 billion in 2015. India has already seen $2.53 billion worth of offshore issuances from the beginning of 2015.

Rupee attractiveness, norm changes
A stable Indian rupee over the last few months, has made it attractive for global investors to look at investments via debt or equity, in India. However, the higher cost of hedging currency risks continues to act as a strong deterrent. With most of these bond issuances for 3-5 year tenures, there will always be a hedging or swap rollover risk that such issuances carry, and that is why it is imperative that hedging costs come down to make such funding attractive.

Indian Promoters traditional outlook with respect to hedging also needs to undergo a change wherein forex exposures are mostly left unhedged. This can make foreign currency denominated loans a ticking bomb on the balance sheets of infrastructure companies that do not have a natural hedge.

RBI has recently emphasized the need for hedging and is seeking to prevent the developing complacency that India is currently enjoying on account of easing inflation and a narrowing current account deficit. Data for July-August 2014suggest that thehedge ratio for overseas loans and foreign convertible debt had halved to around 15%.

In Summary
India embarking on a high growth phase, a phase which will not be possible without investment in infrastructure. Recognizing this need, the RBI and the government are easing norms and improving efficiencies in order to attract overseas investors.Offshore market for Indian companies could see deepening going ahead, which could in turn help bring down the hedging costs and make overseas finance more attractive.

 

Anita Ferreira

Anita Ferreira heads International Business Group at IL&FS Financial Services(IFIN), based in Mumbai.



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Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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