Equity Financing in Infrastructure Sector in India
Aug 20, 2015
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- 1. EQUITY MARKET ININFRASTRUCTURE FINANCING AASHISH DOSHI ( 10BM6002)AMIT BHATIA (10BM6005)ANURADHA CHAKRABORTY (10BM60014)MAYANK MOHAN (10BM60048)PALLAV MAHESHWARI( 10BM60057)
- 2. INFRASTRUCTURE WHAT IS INFRASTRUCTURE? Infrastructure is the basic physical and organizational structures and facilities (e.g., buildings, roads, and power supplies) needed for the operation of a society or enterpriseOver the years Infrastructure has been defined in India in the many ways as given in following Table
- 3. COMPARATIVE DEFINITION OFINFRASTRUCTURE
- 4. Distribution of Investment in Public andPrivate Funding in Various Sectors
- 5. Distribution of Investment as Equity andDebt
- 6. EQUITY MARKET The market in which shares are issued and traded, either throughexchanges or over-the-counter markets. Also known as the stockmarket, it is one of the most vital areas of a market economy because itgives companies access to capital and investors a slice of ownership in acompany with the potential to realize gains based on its futureperformance This market can be split into two main sectors: the primary andsecondary market Financing of Infrastructure through equity is done through PromoterEquity and Tiered Equity which includes Private and Mezz Equity.In the figure wesee that EquityFinancingconstitutes 6%of total financingin the 11th Five-Year-Plan, forthe first 3 years.
- 7. Promoter Equity To infuse equity funding, Promoters have traditionally Used internal cash accruals Raised equity through IPO listings where promoters have sought super normal valuations Equity Infusion in Infra Sectors Equity Infusion in Indian Infrastructure sectors has been a function of the level of maturity of the sector i.e. Indian Highway Sector has seen Equity infusion of USD 4 4.5 bn Power and Roads have seen higher levels of equity investments as compared to other Infrastructure sectors
- 8. Table : Project level return expectationin various sectors in infrastructureInfrastructure Sector Equity ReturnsRoad Sector 14 18%Power Sector PPA / Merchant Power 16 18%/ 30 - 35%Port Sector 15 18%Railway SectorN.AAirport Sector19 24%
- 9. Road Equity requirement as per BKC1614121086420 Market Cap ofEstimated Equityleading Infrastructure Requirement companiesTable 4: Market Cap as on 2nd March from Bloomberg for IRB, GammonInfra, HCC, IVRCL, NCC, Sadbhav, Era Infra, Madhucon Projects, Gayatri Projects, UnityInfra, L&T, GMR Infra, JP Power, Lanco Infratech, Reliance Power & Tata Power
- 10. Private Equity Over the last five years, PE funds have invested approximately US$13 billion, equivalent to one- fourth of the total capital flows to India, into the infrastructure sector. Since 2006, annual PE investment in infrastructure has grown fourfold, from about US$1 billion to US$4 billion in 2010, when it rebounded to 2007 levels. Apart from a brief slowdown in 2009, average deal size has also increasedyet another indicator of growing PE interest in the sector.
- 11. Special Purpose VehicleBecause most infrastructure projects aredeveloped by construction companies, they aretypically structured as multi-tiered entities, eachorganised as a unique SPV. The SPVs aretypically owned by a sector level holdingcompany, which, in turn, is owned by the primarydeveloper. The SPV structure, which is alsomandated by regulation in most sectors, ensuresbetter risk management, as well as greatercontrol for the project sponsor.
- 12. PRIVATE EQUITY FINANCINGOPTIONS: MULTIPLE LEVELS Lately several private equity financing options have become available to Indian developers at multiple levels: Investment at Parent Company Level Deal Size: USD 75mn USD 150mn Sectors: Construction Companies / Construction Subsidiaries of Holding Companies (Post restructuring) Exit - Through IPO Investment at Holding Company level Deal Size: USD 50mn USD 100 mn. Sectors: Road/Power/Port Holding Companies Exit: Through IPO Investment at Asset level Deal Size: depends on project size ( Typically around $ 25 mn, can go upto $ 100 mn ) Sectors: Power Greenfield Assets, Road SPVs, Minor Ports
- 13. RECOMMENDATIONS TO INCREASEEQUITY FUNDING Liberalizing buyback regulations Change in initial bidders Venture or Private Equity funds as bidding partners Steps for improving FII participation Separate treatment for infrastructure holdingcompanies Problems faced by such holding companies are Compliance with stringent regulatory requirementsapplicable to regular lending NBFCs Limits on bank borrowing by these companies ECBs not allowed under the automatic route FDI investment in these companies not allowed withoutRBI approval Investment in these companies by registered venturecapital funds is subject to regulatory approval
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