Mumbai: In a bid to boost investments in the infrastructure sector, capital market regulator Securities and Exchange Board of India, or Sebi, may soon allow venture capital companies to launch specialized debt funds for infrastructure financing.
“We may see the launch of such a fund in (the) next two months. Sebi, in consultation with the Reserve Bank of India (RBI), is working on the guidelines for specialized debt funds for infrastructure,” said a senior Sebi official who did not want to be identified. “The minimum investment for this fund could be $1 million (Rs4.8 crore).” As per the proposal, venture capital firms will be allowed to float debt funds in Indian currency.
Investors in equity funds can sell their stake to another fund and exit at any time—there is no compulsion to stay invested for a certain number of years, but investments in specialized infrastructure debt funds will have a minimum lock-in period of five years. They will be close-ended funds.
Long-term resources funds, generated through this route, will be critical for infrastructure development as the government has estimated an investment of about $500 billion over the next five years, with one-third of the funding coming from the private sector.
Insurance companies, provident and gratuity funds, and pension funds are likely to be allowed to invest in these infrastructure debt funds. If that happens, the relevant regulators will be required to change investment norms for insurance and pension funds.
K. Srinivas, managing partner at BTS Investment Advisors Pvt. Ltd, a Swiss private equity and venture capital firm, said, “This fund will open new avenues of funding for infrastructure companies. Foreign pension funds and global insurance companies look forward to these kind of funds because of higher protection and various tax benefits.”
A venture capital fund is a firm or trust which raises capital through loans, donations, issue of securities or units, and makes investments, primarily in unlisted start-up firms that intend to list their equities on exchanges at a future date.
Currently, there are 129 foreign venture funds and 132 domestic funds operating in India. As on 31 March, the total outstanding of domestic and foreign venture fund investments stood at Rs37,578 crore, according to Sebi data.
Venture capital investment in India grew by 8% between September and March, but these funds are allowed to invest only in equity and equity-related instruments. Sebi does not allow venture capital firms to launch a pure debt fund, but such a firm can invest one-third of its investable corpus in debt or debt instruments of an unlisted company in which it has an equity exposure.
“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.
Sebi, RBI and a panel on corporate bonds and securitization have been discussing the contours of infrastructure debt funds. Usha Thorat, deputy governor of RBI; R.H. Patil, chairman of Clearing Corp. of India Ltd; Chitra Ramakrishna, deputy managing director of National Stock Exchange of India Ltd; and Prithvi Haldea, chairman and managing director of Prime Database, a Delhi-based firm that tracks the primary market, are some of the members of the panel.