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When funds come scarce

Poor returns and the recession are likely to make investors cautious. But a promise from the government might help them change their mind, says Jayashree Kini-Mendes

Two news reports last month has industry watchers of the infrastructure sector heaving sighs of relief. One is Infrastructure India’s announcement to invest Rs450 crore in Oriental Tollways; while the other is IDFC Private Equity’s private equity (PE) investment of Rs2 billion in Deepak Cables.

The reason is clear: With traditional sources of finance in short supply, most Indian companies, including leading corporate houses, are relying on private equity to raise capital.

Suddenly private equity has begun to look more attractive as factors such as the ongoing credit crunch, tighter lending norms imposed by banks and slowing demand have forced companies to prioritise their capital expenditure plans.

“It is this need for capital that is prompting promoters to seek out PE firms. Mainly those companies going ahead with expansion plans and want to tap funds are open to private equity. In the current scenario, private equity remains one of the largest pools of available capital,” says Major VC Verma, director, Oriental Structural Engineers (OSE), a Delhi-based construction company.

Though the domestic infrastructure sector has always been regarded as the engine of the country’s economic growth, market sources say that higher valuations at the time of investing and the subsequent readjustment of the Indian financial markets to global economic environment has expelled all calculations of private equity players.

It was rumoured last quarter that most PE firms are hesitant to invest in Indian infrastructure companies after they saw a significant erosion of their market holdings.

“In real life, the liquidity crunch hasn’t affected PE firms’ fund raising much. They continue to raise funds from limited partners (investors in private equity) as the profile of the partners hasn’t changed. Moreover, most of the investors are here for a long term and definitely not looking for short-term investments,” adds Verma.

Realising that PE firms could help solve most problems, the government taking a cue from private companies embarked on a model of public private partnership (PPP). The idea was to avail quick finance to expedite infrastructure projects.

However, most PE firms were wary of investing in government-sponsored infrastructure projects as their risk factors do not match those of the government. The returns too were not attractive enough. With time came the realisation of the vast potential of such investments followed by the government’s decision to develop a model concession agreement to instil confidence among private investors.

This was an after-thought because the government urgently needed to raise funds to overhaul the country’s roads and highways, mainly the Golden Quadrilateral.

Verma says: “For governments tapping banks is easy. Moreover, nationalised banks want to be in the good books of the government and are magnanimous in lending to the government. It is the private sector that has to be cautious, because government’s terms do not seem attractive.”

Difficult, and proud of it
Now with tendering for the national highways at full steam, the government has resorted to funding the Phase III, IV and V through the PPP route. This elicited an expression of interest from about 50 private companies. For the sake of convenience, the entire package estimated at Rs6000 crore was broken into smaller packages of 60-mile contracts.

However, a feasibility study undertaken by the private investors far exceeded those of the government’s. This was because much the government’s estimates were outdated. Prices of raw materials such as steel, bitumen, cement had shot up, and this was not taken into consideration.

The private investors were embittered. The bidding documents too were outdated and communication to this effect had not trickled down to all the investors. The stalemate continues. A consensus can only be arrived at if the government decides to go by private firms’ calling, since that is where the money will come from. 

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May 2020
11 May 2020