A lot of focus is on the funding required, however even more focus is required on what financial structures and investment vehicles are available in India to assist investors (both foreign and domestics) access the infrastructure opportunities.
The capacity to aggregate high quality assets and raise capital is very useful not just for large conglomerates but also middle-tier businesses and an absolute must for aggregating middle-sized projects (20 to 200 crore rupees) in India to bridge the infrastructure funding gap that has been put in the range of 750 billion USD to 1.5 trillion USD depending on which estimate one looks at. A lot of focus is on the funding required, however even more focus is required on what financial structures and investment vehicles are available in India to assist investors (both foreign and domestics) access the infrastructure opportunities. To take the discussion one step forward it is important to look at what more needs to be done to create greater flow of funds into infrastructure in India. The Infrastructure Investment Trust (InvIT) regulation in India has been a step in the right direction. However, these InvIT structures have strict requirements such as minimum assets of 500 crore rupees that need to be held, minimum offer size of 250 crore rupees, and minimum number of anchor investors required to back a trust structure. While investor protection is foremost on the mind of policymakers, it is important for policy makers to create flexible investment vehicles that provide institutional investors like large pension funds, insurance companies and investment funds access to the middle-tier of the market.
Using a smaller and more flexible version of the Infrastructure Investment Trust with smaller minimum asset requirements and flexibility around number of anchor investors required will allow high quality assets that are medium sized to be aggregated. Not all high-quality assets in India are necessarily large sized projects. For example, high quality solar projects in the 5 to 20 megawatt range can be distributed across a large geographical area. A financial structure that allows an operator to aggregate such solar projects, creates opportunities for investors to access medium sized but economically attractive projects. In addition, financial structures that aggregate medium sized projects create liquidity since investors can trade the units of the financial structures. Such liquidity helps bring down the cost of acquiring and exiting assets, helping bring down transaction costs and creating greater investor confidence. Most importantly such flexible investment vehicles allow middle-tier businesses to reduce their cost of financing. The fact that high quality assets can be segregated in a separate financial structure, allows for such assets to be funded at more attractive rates than when such assets sit on debt ridden balance sheets. The flexible structure allows the debt-ridden companies to monetize the value of the assets and clean up their balance sheets.
In addition to the conditions above, financial structures that assist institutional investors focus on the middle-tier of the market need to be more flexible. Rules that stipulate 90% of net distributable cashflows must be paid to the investors, can at times deny financial structures access to good market opportunities. Having some degree of flexibility around the distribution of cashflows can assist investors to aggregate and access market opportunities better. For instance, if there is an attractive project that can be bought out and improved upon, then the cashflows should be allocated towards buying the project. Beyond this it is imperative that policy makers allow such financial structures to stay unlisted if the investors are only institutional investors. The listing requirements for Infrastructure Investment Trust that minimum asset size be of 500 crore rupees rules out many high-quality medium sized assets from accessing much needed capital.
In summary, the policy recommendation would be an investment vehicle for institutional investors that allows for aggregation of infrastructure assets with a lower limit for minimum asset size, fewer anchor investor requirement, less stringent requirement around cashflow distribution and a non-compulsory listing requirement. Such an investment vehicle will greatly assist institutional investors access middle-tier infrastructure opportunities in India. In finance parlance, the “non cusip instruments” need liquidity and flexibility to unlock real value.
(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm. He can be contacted at firstname.lastname@example.org or @taponeel on Twitter)