Is government running out of ideas for infra projects funding?

IRB Infrastructure Developers  | In 2020 so far, the share price has moved up 76 percent to Rs 131.20. It's trailing twelve months (TTM) P/E was 6.40 multiple while 5-year average P/E was 8.30 multiple.

Shishir Asthana Moneycontrol Research

The biggest issue holding the country back from achieving faster growth rates is a non-functional banking sector. The entire public sector banking space and some private sector players have way too many non-performing assets in their books that they are afraid to venture out anymore. Lack of funds is preventing companies, more small ones than bigger ones, to take expansion initiatives. The bigger players, especially the listed ones have other avenues to raise money.

One of the avenues that were very well used by bigger corporates was to tap the foreign market for funds. Apart from the conventional banking route the government introduced new instruments for companies to tap the foreign market. One such instrument was Masala Bonds which was rupee-denominated.

Indian bonds were a victim of their own popularity. Wontae Kim, Research Analyst at Western Asset Management, in an email reply to CNBC summed it up well when he said: "India offers a mix of relatively high yields, a firm political mandate, improving fundamentals and foreign exchange stability that few markets can."

India has capital controls in place to avoid the excess flow of capital which can disturb the liquidity and currency market. However, they are proving to be insufficient in the wake of the flood of money coming in. India currently caps total foreign investments into corporate bonds at Rs 2.44 lakh crore or around USD 38.1 billion. In July, overseas buying crossed 92 percent of that quota in July resulting in the government suspending issuance of offshore rupee-denominated bonds until foreign holding falls back below that level.

Rather than slowing down, buying enthusiasm gained more momentum as Indian holders sold their bonds to foreign players resulting in foreign holding crossing the 99 percent mark for the last one month.

What this effectively means is the window of raising money from international market is limited. The government has to thus depend on domestic markets for raising money.

Restrictions to raise money from foreign sources come at a time when the country needs Rs 10 lakh crore over the next few years to meet its infrastructure funding requirement. However, the government seems to have found a way to raise money. Reports say that the government is now considering raising Rs 10 lakh crore from retirees and provident fund (PF) beneficiaries to fund large infrastructure projects facing a shortage of bank credit.

Transport Minister Nitin Gadkari has been quoted as saying that money will be raised in tranches of Rs 10,000 crore by selling 10-year bonds at a coupon of 7.25-7.75 percent. Each tranche will be for specific projects. As per government’s budget, an investment of Rs 3.96 lakh crore was planned in the current financial year to bankroll the new integrated infrastructure programme - constructing roads, railways, waterways, and airports.

As infrastructure projects have a long gestation period, it makes sense for the government to tap this huge resource of retiree and provident fund beneficiaries. It’s a win-win proposal for the developers as well as the investors.

Rather than waiting for months to raise money from banking circle, project developers can raise money faster through the bond route provided they get an investible rating from the agencies. For the investors a capital-protected instrument with tax incentives makes sense.

However, given the size of funds that is needed going forward, the government will have to look at various sources to raise money as retiree money might not be enough to meet the demand for funds. Indian provident fund and pension fund markets are not big enough to fund its infrastructure financing needs. Depending on retirees to raise funds only highlights the limited options it now has to meet the infrastructure requirement.

The loser in the entire proposal is the banks. They will have to look out for smaller projects in order to deploy their funds. Though risks will be spread in such cases, there will be an asset liability mismatch for the banks. The bankers have put themselves in such a position that there will be few sympathizers for them if they miss this opportunity. At best the bank's treasury can subscribe to the bonds in case they ever get out of the present mess.

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