The proposal to allow road developers to divest their entire equity in projects immediately after achieving commercial operation hasn’t found favour with the finance ministry, which feels this would let road projects to become tradable commodities and allow entry of non-serious players into this segment. The road ministry, which mooted the proposal, contended that easier exit policy would facilitate unlocking of funds and enable investors to bid for newer projects in the sector that is facing a host of problems, including financing constraints.
The issue, which is now likely to be taken up by the cabinet committee on economic affairs (CCEA), has divided the government with finance ministry and Planning Commission opposing the changes while road ministry pushing the proposal to address the issue of fund constraint being faced by developers to take up new road projects.
Under the existing norms in place since November 2009, developers must hold at least 26% of equity up to two years after the commercial operation date (COD) of projects. Moreover, developers of build-operate-transfer (BOT) projects awarded before 2009 do not have the option to exit the project for the entire concession period.
According to sources, the department of economic affairs (DEA) in the finance ministry said the proposed relaxation could result in a strong nexus between the developers and operations and maintenance companies. The fear is that this would allow entry of non-serious and inexperienced players who could seriously compromise the quality of road projects.
Once the proposal is implemented (to exit projects completely), it will help the developers who have equity in the projects awarded to them prior to 2009 to make a complete exit. The relaxation, however, is proposed to come with a rider ? the National Highways Authority of India (NHAI) board will decide whether the company seeking exit is critical enough for the project. It could deny such option if not convinced about the new buyers of the projects.
The ministry of road transport and highways had circulated a cabinet note proposing these amendments in the model concession agreement (MCA) to ease exit by developers. ?The developers are over-leveraged and are not in a position to access bank finances due to lack of equity capital. Thus, once they are allowed to divest then they can use this equity to participate in fresh bids,? the source added.
Experts said once the exit policy is amended, highway projects will not only attract investors but will also help the market position of developer companies. Banks have already turned wary of roads sector due to the long project durations, ?unsecured? nature of advances and huge regulatory delays, choking credit for developers.
?Concessionaires currently have to hold equity in a road project for years after completion, while they would like to exit after completion of a project and deploy the freed-up funds in fresh projects,? said M Murali, director-general, National Highways Builders Federation (NHBF).
The move is part of a series of measures being planned by the government to ease the funds crunch in the sector and revive investor interest.
NHAI had earlier said that the shares of many highway builders, which went public in the last 4-5 years, are trading much below issue price. There have been no fresh equity issues of highway builders in the last 2-3 years. Thus, raising fresh funds through share sales seems unlikely, making exit important for companies.
?There are many PE firms and investors interested in investing in completed road projects and not in the new projects. The government should not lose this opportunity and should rather cash in on the same during these tough times,? NHAI had said.
