The Union Cabinet’s recent decision to allow debt-ridden road developers to reduce their loans by exiting some projects may have been a welcome move but it is not going to resolve all their woes.
Late August, the Cabinet Committee on Economic Affairs, had approved a proposal to allow infrastructure companies—mainly in the road sector—to divest 100% of their equity after two years of completion of construction for all projects given as per the build-own-transfer model, irrespective of the year the contract was handed out. The decision was aimed at allowing companies to use the funds from the sale of equity to invest in other projects as well as repay their debts, a government note said.
The decision came at a time when infrastructure companies are reeling under heavy losses because of the high-interest loans they had taken for their projects, but were unable to repay as some of the projects got delayed due to regulatory obstacles. This also decreased the income of banks and financial institutions which have turned wary of lending to the infrastructure sector, fearing default.
While the Cabinet decision will help to an extent, the ground level reality is that the sector faces an acute shortage of buyers for such projects. Also, while the exit clause covers the construction risks, the bigger issue of uncertainty in Indian policy making has not been addressed, say executives and analysts.
AM Naik, group executive chairman of Larsen and Toubro Ltd., India’s biggest infrastructure firm, says the 100% exit clause will help only to the extent that the entire construction risk is taken care of. The fear of policy flip-flop has not been addressed, he says. “We need to tighten rules for an investor to come and be sure of the prospects of long term profitability,” he says.
“Buyers will come from overseas markets,” he feels on the issue of lack of Indian buyers. “Basically they want business to be simpler, faster and decisions with fewer impediments.”
Road developers say it is difficult to hold on to the asset for even two years after completion of construction, as the debt goes up because of cost escalations due to inordinate delays for land and other clearances, legal disputes and arbitration proceedings. Holding on to the asset only stretches a developer’s balance sheet further, and dissuades other investors from getting into the business.
“This step adds insult to injury,” says Arjun Dhawan, president & chief executive of HCC Infrastructure Ltd., an arm of the Mumbai-based civil contractor HCC, when asked for his response to the Cabinet decision. HCC has a consolidated debt of R11,898 crore as on March 31, 2015, according to Bloomberg. HCC is among the many companies that have been affected by slow decision making on part of the government.
“We have to be much bolder. What would have been far more welcome was to allow developers to exit on COD itself or Schedule Four Laning Date (SFLD) plus two years,” he says. SFLD is the target completion date fixed by the National Highways Authority of India at the time of signing of the original concession agreement with developers.
Dhawan’s argument is that since the NHAI fixes a target commissioning date, it should allow developers to exit two years after that date, in cases of delays in land acquisitions or procuring of clearances. “This way the concessionaire is not really waiting for the project to be commissioned, which takes place 3-4 years later,” he says.
Virendra D Mhaiskar, chairman and managing director, IRB Infrastructure Developers, says it would anyway take 5-6 months for developers to find an investor and finalising a deal is also time-consuming. “Reducing the exit time-line to one year or less would have been a more welcome step. At the same time, we feel that an investor would like to see some revenue collection history on the asset, so there is nothing much out of place in terms of timeline,” he says.
Varun Mehta, chief financial officer, Sadbhav Infrastructure Project Ltd, says that from an administrative point of view the policy is clear. “There are no taxation or penalty clauses. The policy simply states that if you have an operating asset with two years of toll collection history, it can be exited by the promoters, which is a welcome move”.
The Cabinet decision would release at least R4000 crore to the developers, estimates India Ratings and Research, a unit of Fitch Ratings. “The current move by the government is a push to the infrastructure sector which had stalled projects worth R8.8 trn or 7% of GDP as of December 2014,” India Ratings says. The ratings agency expects the decision to “give a boost to weak sponsors” of at least 20 of the 86 road projects completed by companies along with the National Highways Authority of India, under the public-private partnership mode.
Some deals have indeed been signed post the Cabinet decision. Gammon Infrastructure Projects Ltd, for instance, has sold its stake in nine projects—including six road projects—valued at over R2,600 crore, to Brookfield and Core Infra India Fund, making it one of India’s biggest asset sales in a single deal. This would result in aggregate cash inflow of about R948 crore into Gammon Infrastructure, while it would get another R100 crore on crossing certain milestones as per the deal agreement.
KK Mohanty, managing director, Gammon Infrastructure, says that while the 100% exit policy has helped in divesting stake in assets, the success of the process is dependent on the speed at which approvals are granted by the government and its agencies.
The decision has helped one sector for sure: the banks. “Now the promoter can exit completed projects and invest the proceeds in incomplete projects and this is akin to de-stressing the sector,” said Animesh Chauhan, managing director and chief executive officer of Oriental Bank of Commerce. “As far as bankers are concerned, they are happy as this reduces stress on our books”.
However, HCC’s Dhawan is sceptical about the sector being de-stressed following the decision. He says the projects from which developers are being allowed an exit are much smaller in size. Since companies were allowed to exit 74% of their stakes in these assets, the move to allow exit of an additional 26% will not free up any substantial capital, or benefit the sector, as expected by the government, he says.