L&T Infra

Enablers for Infra Finance

ADB Workshop in Manila, Philippines 30 September 2011 L&T Infrastructure Finance Co Ltd
Ramesh M. Bhujang Vice President - Corporate & Strategic Affairs

The views expressed in these presentations are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make any representation concerning the same.

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Agenda
Definition of Infra Clarity in regulation & rationalization of stamp duties Modifying
Investment criteria for investment companies Investment criteria for banks Guidelines/ regulations Taxation

Annex
Infra enablers in recent years Key issues for Infra projects Sources

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Common definition of Infra

Area Action required (Broad level) Action required (Specific)

RBI's definition could be uniformly assumed; Principle of "Transferability" and "Natural Monopoly" could be the basic principles for classification as "Infra". (For Harmonising the definition Definition of example, Cement and steel can be imported by RBI, IRDA, Income Infrastructure and exported i.e. transferred and would not Tax, ECB etc form a part of "Infra"; road, power plant, telecom network, pipeline network etc cannot be transferred and would form a part of "Infra")
Could facilitate (1) insurance companies channelize funds to Infra (2) assist in designing fiscal incentives for infra (3) assist consistent tracking of progress in Infra (4) improve trading in infra papers or bonds
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Clarity in regulation & rationalization of stamp duties

Area Action required (Broad level) Implementation of the RH Patil Committee recommendations Action required (Specific) Several areas including consolidation of all regulations on issuance of corporate debt securities under SEBI Advantage of such action Single regulator and clarity

Clarity in regulation

Corporate bonds

Rationalise stamp duties across states

Implementation of the Indian Help in the Stamp Amendment Bill 2011 may development of a enable rationalisation of stamp vibrant debt market dueties across states.

Slow progress has been made towards rationalization of stamp duties across various states in India Complete implementation of the RH Patil Committee Recommendations (2005/06) is pending

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Modifying criteria for investment by Insurance Companies

Area Action required (Broad level) Lower threshold criteria for minimum credit rating forinvestment by insurance companies in Infra related bonds (as of now insurance companies can invest in AA and AAA rated bonds) Relaxation of dividend payment as criteria for investment by Insurance companies Action required (Specific) Since most Infra projects (SPVs) would be rated BBB- or above in the initial period, Insurance companies could be permitted to invest in bonds issued by Infra companies rated at "Investment Grade" or above (by amending the definition of "Approved Investments") Insurance companies can invest in companies that have paid dividend for 7 out of 9 past years; this criteria needs to be relaxed for investment in Infra companies. Infra companies by their very nature (long gestation) would take some time before they become regularly dividend paying. Inclusion of all equity investments in listed infra companies as also "equity mutual funds" as "approved investments" for insurance companies. Insurance companies could additionally have supplementary criteria in terms of their return expectation.

Criteria for investment by Insurance companies

Criteria for investment by Insurance companies

Criteria for investment by Insurance companies

Inclusion of all equity investments in listed infra companies

The above could help channelize much-needed long-term Infra Project Finance Structured Products Financial Advisory Services Insurance funds into Infra

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Modifying criteria for investment by Banks

Area Action required (Broad level) Action required (Specific) Advantage of such action Banks can take a higher exposure to Infra and manage ALM mismatches

Underwritten exposures could be excluded from the definition of Infra (with a limit of say 5% of Exclusion of underwritten NOF) where the stated intention is to sell-off the Underwritten exposures from the definition asset in 6 months. In case this does not exposures for banks of "Infra" happen in 6 months, the Bank/ NBFC / IFC would have to bring in additional capital In case of lending to SPVs on SPVs that do not have recourse to parent Definition of "Group" non-recorse basis, the SPV companies/ Group need to be at differentiated exposure need not be included under wrt "Concentration Risk" "Group" exposure As on date, the takeout financier as well as the initial financier need to set aside capital (risk weightage 100%, capital conversion).

Banks can take higher exposures to "Infra"

Risk weight for Takeout Financing

Both initial lender and takeout financier currently set aside capital from day 1 although takeout may happen only after 5 years. Proposed that Encouragement to the capital conversion and risk weightage could takout financing be 0% till such time the asset is transferred to the books of the takeout financier Lower SLR requirement for banks for their investments in "Infra" Banks can take higher exposures to "Infra"

Lower SLR requirement for SLR requirement for banks for their investments banks in "Infra"

The above could enable larger flow of funds from Banks to infra
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Modification to regulations/ guidelines

Area Action required (Broad level) Action required (Specific) Advantage of such action Infusion of equity becomes easier wrt UMPPs/ other large Infra projects. Buyback regulations restrict placement of equity In the case of unlisted Infra with suppliers as only limited amounts can be bought back later. Esp in the case of UMPPs companies, buyback Buyback regulations where 20-30% of the equity requirement is a regulations could be very large amount, easing regulation could help liberalised. equity infusion Permitting refinance through ECBs for Infra projects could help foreign financiers participate Refinance through ECBs post-construction when the risk is lower and Refinance/ ECB could be permitted in case of guidelines release domestic bank funds towards new Infra companies. projects; local banks would also be able to churn their portfolio permitting better ALM. Monoline Credit Insurance company could raise LT FC bonds subscribed to by RBI out of forex reserves. It could have a minimum capital. Setting up of a Monoline Funds could be invested in high rated securtities. Credit Insurance company Backed by such collateral, "credit wraps" could offering credit enhancement be given for a fee for Infra projects to raise for a fee, abroad. resources internationally. While this would principally help access 15-25 year funds, it may not necessarily provide a better pricing.

Infusion of forign debt to infra projects

Monoline credit insurance

Credit enhancement and enabler for long term funds for Infra projects.

Infra Project Finance

The above points could help attract Structured Products foreign debt & equity to Infra Financial Advisory Services
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Modification to taxation
Area Action required (Broad level) Action required (Specific) Dividend Distribution Tax reduces returns to equity investors in multi-tier corporate structures. Rationalisation of DDT could help reduce the cascading effect in reducing equity investor returns. 2008. Budget did make an attempt towards solving the problem in relation to one-tier holding structures. Tax rebates could provide another channel for individual investors for investment. Advantage of such action

DDT

Rationalisation of DDT

Equity investors' could generate higher returns in Infra projects.

Tax rebate wrt UMPPs

Tax rebate for individual investors in UMPPs through public offerings could be considered.

Retail interest in UMPPs Equity investment in unlisted Infra companies could become more attractive

Tax on unlisted equity shares

Today unlisted equity shares Rationalise the tax on unlisted equity shares in attract a different level of tax Infra companies could attract higher levels of on transfer. Rationalisation is private equity investments. suggested.

Equity and retail interest in Infra projects could be enhanced

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Annex

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Infra Enablers in recent years (1)

Area Action (Broad) Removal of TDS on corporate bonds in line with GoI securities Action (Specific) Advantage of such action

Corporate bonds

Corporate bonds

Permit repo transactions on corporate bonds

Investors not subject to witholding tax find it difficult to sell to those subject to witholding tax Trading volumes could (Insurance cos). Removal of TDS on corporate increase bonds in line with GoI securities could eliminate this constraint. Secondary market Permit repo transactions on corporate bonds in trading could increase if inter-bank repo market through a specialised there are enough clearing & settlement platform; guidelines have dealers offering quotes been issued 1 year back in the market Banks have been permitted to invest in rated & unlisted bonds for Infra companies; Infra bonds > 5 years could be HTM category upto x% of total liabilities (ceiling fixed by RBI from time to time) Could bring banks into the corporate bond market. Could bring symmetry in regulation for instruments with similar underlying risks.

Earlier, banks could not invest in unrated bonds but can do so in unrated loans. Loans versus bonds Banks need to MTM bonds but not loans. Rectification of this anomaly could be considered.

The above changes in recent years could help as Infra enablers

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Infra Enablers in recent years (2)

Introduction of credit default swaps so investors can gauge more accurately the risk of buying corporate bonds. Permit for foreign funds to buy more corporate debt Tax exemption for investors buying bonds to support infrastructure projects. The FII limit for investment in corporate bonds has been hiked from US$5 billion to US$25 billion. Increasing exposure norms for "Infra" ECB for on-lending to Infra permitted for IFCs Witholding tax reduced Permit for Infra bonds

Policy response on Infra Debt Funds

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Key issues for Infra projects (1)

Land acquisition Environmental regulations/ guidelines Fuel linkages Project execution capacity issues due to non-availability of skilled labour Policy clarity in telecom/ litigation Power evacuation Infra Import of coal port inadequacies Availability of railway rakes Water availability for projects

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Key issues for Infra projects (2)

Financial losses of distribution entities Aggressive bids in solar, roads Mining Bellary issues Iron Ore Port connectivity and deep draft Subdued equity market conditions Low liquidity of corporate bond markets Low levels of credit enhancement due to lack of credit enhancers

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Sources
Secondary sources/ Annual Report/ Press articles Government Committee Reports SEBI/ FII/ IFCs IBEF/ RBI Annual Report/ BK Chaturvedi report RBI Governors speeches

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