To slash financing costs of infrastructure firms
In what may come as a big equity support to infrastructure companies, India Infrastructure
Finance Company (IIFCL) will shortly set up a Rs 5,000 crore infrastructure equity fund.
Under the proposed plan, infrastructure firms can pledge a part of their equity with the government-owned financing institution against infusion of equity funds in a special purpose vehicle (SPV) floated for a particular project. Once the SPV has the money to return, it can redeem its shares from IIFCL against payment of a fixed fee.
Equity financing will come with a rider. Promoters of SPV will have to provide guarantees for repayment of equity funds provided by IIFCL. The institution, however, will not insist on additional security from promoters.
“We need to create new products for infrastructure sector for future projects. We are planning to set up a Rs 5,000 crore infrastructure equity fund. It would be announced after our credit enhancement scheme that is expected to come by this month end,” SK Goel, chairman and managing director of IIFCL, told Financial Chronicle.
The new equity fund will work in tandem with the debt fund announced by prime minister Manmohan Singh. Based on planning commission’s report, Singh had announced setting up of a Rs 50,000 crore debt fund to meet long-term debt requirements of core sector projects through public-private partnership.
As in the debt fund, insurance companies and pension funds will also be roped in to participate in the equity fund. “Initially, we would begin with Rs 5,000 crore where insurance firms and pension funds can put in their money too. Gradually, we would have more funds. We would appoint separate trustees who would accord the equity support and for each fund there would be different managers,” Goel said.
“It will be long-term equity funding, but the tenure is yet to be decided,” the IIFCL chairman said.
Infrastructure companies and sector experts have already given thumbs up to this equity fund. They want sizable and longer-term equity support from IIFCL. “Almost all infrastructure firms need equity support at the moment. The fund, if planned well, would help companies utilise their own funds more efficiently and in more projects,” said Vishwas Udgirkar, senior director, Deloitte India.
Debt-equity ratio for an infrastructure project would be 70:30. Most of the infrastructure developers go for private equity placements. One of the biggest advantages of this fund would be saving in interest or return costs that are quite high in case of debt and private equity.
“The return to private equity is as high as 24 per cent. The equity support from IIFCL should bring down that cost significantly. The most important thing is that the product should be sizable, meaning, it should take care of at least 30-40 per cent of the total equity being put in a particular project. The other important things are that it should be for long tenures and IIFCL should not seek any security other than the pre-determined fee,” A Subba Rao, group chief financial officer of GMR Infra, said.
Pervez Umrigar, managing director of Gammon India, echoes similar views. “If the requirement for infrastructure sector has been pegged at $1 trillion, then every mode of financing that can be opened should be opened. The equity support from IIFCL would help reduce private equity cost that is higher primarily due to management fee,” he pointed out.
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Under the proposed plan, infrastructure firms can pledge a part of their equity with the government-owned financing institution against infusion of equity funds in a special purpose vehicle (SPV) floated for a particular project. Once the SPV has the money to return, it can redeem its shares from IIFCL against payment of a fixed fee.
Equity financing will come with a rider. Promoters of SPV will have to provide guarantees for repayment of equity funds provided by IIFCL. The institution, however, will not insist on additional security from promoters.
“We need to create new products for infrastructure sector for future projects. We are planning to set up a Rs 5,000 crore infrastructure equity fund. It would be announced after our credit enhancement scheme that is expected to come by this month end,” SK Goel, chairman and managing director of IIFCL, told Financial Chronicle.
The new equity fund will work in tandem with the debt fund announced by prime minister Manmohan Singh. Based on planning commission’s report, Singh had announced setting up of a Rs 50,000 crore debt fund to meet long-term debt requirements of core sector projects through public-private partnership.
As in the debt fund, insurance companies and pension funds will also be roped in to participate in the equity fund. “Initially, we would begin with Rs 5,000 crore where insurance firms and pension funds can put in their money too. Gradually, we would have more funds. We would appoint separate trustees who would accord the equity support and for each fund there would be different managers,” Goel said.
“It will be long-term equity funding, but the tenure is yet to be decided,” the IIFCL chairman said.
Infrastructure companies and sector experts have already given thumbs up to this equity fund. They want sizable and longer-term equity support from IIFCL. “Almost all infrastructure firms need equity support at the moment. The fund, if planned well, would help companies utilise their own funds more efficiently and in more projects,” said Vishwas Udgirkar, senior director, Deloitte India.
Debt-equity ratio for an infrastructure project would be 70:30. Most of the infrastructure developers go for private equity placements. One of the biggest advantages of this fund would be saving in interest or return costs that are quite high in case of debt and private equity.
“The return to private equity is as high as 24 per cent. The equity support from IIFCL should bring down that cost significantly. The most important thing is that the product should be sizable, meaning, it should take care of at least 30-40 per cent of the total equity being put in a particular project. The other important things are that it should be for long tenures and IIFCL should not seek any security other than the pre-determined fee,” A Subba Rao, group chief financial officer of GMR Infra, said.
Pervez Umrigar, managing director of Gammon India, echoes similar views. “If the requirement for infrastructure sector has been pegged at $1 trillion, then every mode of financing that can be opened should be opened. The equity support from IIFCL would help reduce private equity cost that is higher primarily due to management fee,” he pointed out.
