“Equity capital is not sufficient for implementing infrastructure projects. Given the increasing demand for infrastructure projects, raising $500 million-1 billion should not be a problem for venture capital debt funds. Returns on such funds will depend on investment managers, but investors can expect yields in the range of 10-13%,” said Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance Ltd, a non-banking financial company engaged in infrastructure financing.
Avnish Bajaj, co-founder and managing director of Matrix Partners India, a foreign venture capital firm, has a word of caution: “They will allow for a deeper financing market for infrastructure projects, but the viability of projects needs to be addressed.”
Sandeep Aneja, co-founder of Kaizen Management Advisors Pvt. Ltd, a private equity firm focused on the education sector, also asked for close monitoring of certain critical issues. “Such funds increase the possibility of private participation in infrastructure spend from both domestic and international sources, but one would need to monitor activities that relate to securitization of such debt and ensure that the life of the fund is co-terminus with that of the life of the infrastructure project.”
Even though the infrastructure debt funds will have predominant exposure to debt instruments, they will be allowed to invest a small portion of the fund in non-convertible preferred stock. The existing funds are currently allowed to invest only in compulsorily convertible preferred stocks.
Preferred stocks are those in which the investors get their money back ahead of common shareholders in case the company goes for liquidation. If a company fails to deliver the desired profitability in a given time, preferred stockholding allows investors to get returns on their investments in the form of fixed cash flow or dividends on a quarterly or annual basis. In the case of compulsorily convertible preferred stocks, the investor needs to convert preferred stocks to equity in order to get dividends.
For non-convertible preferred stocks, the investors would have more leeway to redeem their investments at any time if the firm does not perform. “The process of converting preferred stocks into common equity is cumbersome. If a company fails to fetch the investors the desired profitability, a non-convertible preferred stock option would enable us to get returns out of the company’s cash flows without requiring us to go through the tedious process of converting the preferred stocks into common equity” said Srinivas of BTS Investment Advisors.
The Sebi official said the infrastructure debt funds could be asked to invest a maximum of 33.33 % in listed debt securities, on the line of traditional venture funds that are subject to a restriction on the maximum they can invest in listed equities. “Any investor looking at steady and safe cash flows will invest in these funds. Global limited partners registered with the Securities and Exchange Commission are most likely to invest in such funds as the investments are likely to be secured,” said Sandeep Singhal, co-founder of Nexus India Capital, a venture capital financing company.