Capital was scarce, expensive, and difficult to garner in the domestic market in the last three to four years. Tough laws and regulations, coupled with a highly volatile rupee, meant that opting for the overseas route wasn’t an option either. Given the policy paralysis of the United Progressive Alliance government, and the prolonged slowdown in the domestic and global economy, the headache of raising capital had become severe.
That was until Finance Minister Arun Jaitley tried to mitigate this problem in his first Budget by announcing a slew of measures that will ensure greater flow of domestic and foreign capital into the Indian market and industry. Enter real estate investment trusts and infrastructure investment trusts, which allow individuals, institutional players, and others to invest in large-scale, income-generating commercial real estate and infrastructure projects. “Long-term capital will now be available to those sectors that were denied loans by banks and other financial institutions because of their poor economic health and project risks,” says Avinash Gupta, head, financial advisory, at consultants Deloitte India.
The trusts provide a way for individual and institutional investors to earn a share of the income generated by an operational commercial real estate project or an infrastructure project without actually buying the property. While construction risks are taken care of, investors are promised an annual return on their investment. For private equity players, these trusts can not only be listed on the bourses later but also come with an easy exit route.
“Earlier, overseas capital was only allowed in IT parks and special economic zones. Now on offer are new asset classes like office buildings, shopping malls, apartments, hotels, roads, resorts, and warehouses,” adds Gautam Mehra, executive director, tax and regulatory services, at consultancy PricewaterhouseCoopers.
However, such trusts can only be successful if the tax rates are low and structured properly. Think Singapore, where companies have raised millions of dollars through this route. “It will also help infrastructure companies raise finance because they can now offer their completed projects to these trusts,” says Girish Vanvari, partner and co-head, tax, at consultants KPMG India.
Jaitley’s proposal to grant a concessional 5% withholding tax on all foreign, long-term bonds, and not just infrastructure bonds, also opens new avenues for long-term overseas borrowings by companies. “We’re talking of a 4% to 5% interest rate on debt capital abroad, compared with 14% to 15% in India,” adds Mehra.
The other big innovation in financing has been announced in the banking sector. Asset-liability mismatches in providing long-term finance to infrastructure and real estate companies mean that banks have been reluctant to disburse loans to the private sector. The reason: While these companies typically require 25 to 30 years for their projects to start generating cash flows, banks require returns on their investment within five years.
In an effort to set things right, the Budget allowed banks to raise long-term funds and provide financing to infrastructure players by freeing up mandatory savings on their statutory liquidity ratio (SLR), cash reserve ratio (CRR), and priority sector lending (PSL). “This not only increases the availability of funds to the banks, but it does so at a far lower rate of interest,” adds Mehra. Incidentally, banks used to keep aside nearly 70% of their lending amount to SLR, CRR, and PSL.
Jaitley is all for revamping the rules for raising money through American depository receipts and global depository receipts as well. The idea is to make it easier for Indian companies to raise equity by listing on international bourses like the NYSE and LSE.
Also, by permitting the international settlement of Indian debt securities like the Indian Depository Ratio, launched by the Standard Chartered Bank some years ago, the government plans to make it easier for foreign players to invest in Indian debt securities.
