Corporate Borrowers Run to the Markets as Indian Banks Wilt

  • Road makers seek out alternative ways to raise funding
  • Publicly traded debt instruments help revive Indian borrowing

India’s record-low corporate spending may be poised for a turnaround as road builders and power generators seek alternative ways to raise money.

Stymied by a lending paralysis among its domestic banks, infrastructure companies are increasingly turning to investment trusts and the corporate-debt market for funding. India is also planning to set up new infrastructure banks to encourage spending and circumvent the world’s worst bad-loan ratio as banks grapple with more than $180 billion in stressed assets.

“I see the beginning of a fairly historic shift in financing in which private sector companies are moving away from banks to capital market instruments,’’ said Vinayak Chatterjee, chairman of infrastructure-services firm Feedback Infra Pvt. “I see a deeper pattern.’’

Already, funds raised through corporate bonds sales surged 40 percent to 3.31 trillion rupees ($51.5 billion) in the year through March from the prior 12 months, according to a May 17 note from Prime Database which tracks India’s primary capital markets.

Revival in corporate investments is crucial to fill a $1.5-trillion investment gap in the next decade as India seeks to connect its cities and electrify villages. Companies will be able to bid for projects as the government rolls out its plan to spend a record 3.96 trillion rupees on building infrastructure.

Since September, India has reformed its financial markets to make it easier to access. The country relaxed rules for investing in infrastructure and real estate trusts and has allowed foreign investors to trade directly in the corporate bond market. This month, it amended a law to give the central bank power to spur lenders and borrowers to take write downs.

Masala Bonds

The overhaul is part of a policy drive by Prime Minister Narendra Modi to boost investment, growth and jobs ahead of elections in 2019. The latest reform, a goods and services tax designed to unify the country in to a common market and make doing business easier, is set to roll out on July 1.

India has traditionally used public-private partnerships to fund infrastructure projects, where debt came from public sector banks and equity from private investments. But the country likely recorded negative growth of 0.2 percent in private investments in the year ended March compared with growth of 3.9 percent last year, according to estimates cited by the India Economic Survey document.

Real estate and infrastructure trusts, which were in the making for 10 years, are expected to make available as much as $9 billion, according to Birla Sun Life Asset Management Co. Trusts are hybrid instruments that pool investments, generate bond-like yields and are traded like an equity on the stock market.

India’s first infrastructure trust by IRB Infrastructure Developers Ltd. began trading May 18.

Indian companies mainly comprising of road developers and power generators are also seen selling at least $1 billion of Masala bonds -- debt in rupees issued outside the country -- in comings months.

"Bank financing to the infra sector is declining, making it imperative for investors and developers to scout for alternate sources of funding such as masala bonds, InvITs," India Ratings and Research, a Fitch group company said in a recent report.

Greater Interest

“We don’t have any problems regarding funds,’’ Nitin Gadkari, India’s roads minister, said in an interview on May 10 about raising debt. “All pension funds, insurance funds, investors, bankers are keenly interested in investing.’’

Gadkari spoke before the National Highway Authority of India sold 30 billion rupees of masala bonds earlier this month. Indian power firms are also looking to raise $1 billion worth of masala bonds from London.

The results of easier access to funds are showing. The number of delayed infrastructure projects fell by 43 percent in January 2017 from 2015, according to a government report. Cost overruns have reduced to 11 percent from 20 percent from March 2015.

Another reason for easier funding is “far greater interest’’ among long-term institutional investors like Canadian and European pension funds, according to Chatterjee, who spoke on the phone from Gurugram, near New Delhi.

Canada’s Brookfield Asset Management Inc. and Canada Pension Plan Investment Board have raised their India investments to more than $15 billion, much of it focused on infrastructure. Foreign investors bought 307 billion rupees in Indian debt from April to May 23, according to National Securities Depository Ltd.

“For country of our size if you rely on the bank to fund infrastructure, you hit a ceiling,’’ said Pratik Agarwal, chief executive officer of Mumbai-based Sterlite Power Transmission Ltd., which also plans to raise funds through an investment trust. “Anyone who has a growth strategy in infrastructure will not rely on the Indian bank market for his growth.’’

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