Buying and selling road projects in India just got easier. On 9 September, the National Highways Authority of India (NHAI) issued a circular relaxing the equity lock-in restrictions for concessionaires for its build-operate-transfer (BOT) projects. This new policy allows concessionaires to completely divest their equity from road BOT projects two years after the completion of construction provided that their divested equity is:
- Reinvested in incomplete NHAI projects;
- Reinvested in other highway projects;
- Reinvested in power projects; or
- Used to retire debt owed to financial institutions in road or other infrastructure projects.
The past several years have seen few bids for public-private partnership projects in India, in part because of the lack of available equity.
During 2014-15, roads in India were built at an unimpressive 12 kilometres per day, against the targeted 17 km/day. Despite not meeting this target, the Ministry of Roads, Transport and Highways’ projected average of close to 30 km/day for 2015-16 is nearly double the previous year’s target. While this projection is ambitious and may be difficult to achieve, the new policy should help in freeing locked-in equity and increasing interest in the sector.
The earlier position on lock-in restrictions of such projects was as follows: for projects awarded pre-2009, the concessionaire was required to maintain 26% equity at all times; and for projects awarded post-2009, complete divestment of the concessionaire’s equity was permitted after two years from the commercial operations date.
Interestingly, in June 2015, NHAI issued a circular allowing 100% equity divestment for concessionaires in BOT projects, two years after completing construction. However, this relaxation came with a stipulation that the divested equity be reinvested in the concessionaire’s own incomplete NHAI projects.
The National Highways Builders Federation argued, understandably, that since all developers did not have other incomplete highway projects, this relaxation should be extended to cover other developers as well. Showing a degree of responsiveness, NHAI amended the policy to its present form to include a wider pool of developers.
Policy in operation
Significantly, the amended policy has already been taken advantage of.
Last month, NHAI permitted IJM Trichy and Shapoorji Pallonji to divest 100% of their equity in the Ulundurpet-Padalur section of NH 45 in Tamil Nadu in favour of Macquire SBI Infrastructure Investments and SBI Infrastructure Trust Roads.
In August, Gammon Infrastructure Projects sold six of its road projects to Brookfield Asset Management and Core Infrastructure Fund for ₹29.35 billion (US$443 million). This transaction also perhaps reflects that foreign investor sentiment on the Indian roads sector is becoming positive.
Why it makes sense
Many Indian infrastructure companies have highly leveraged balance sheets at their holding company levels. This is driven by the fact that these companies are often supporting severely stressed special purpose vehicles in different projects. The new policy should help these companies to reduce their corporate debt and recycle capital for other infrastructure investments. It is also likely to open up investment opportunities in mature road assets.
The day after the announcement of the new policy the stocks of companies in the roads sector such as IRB Infrastructure Developers, Jaiprakash Associates, Gammon Infrastructure and Ashoka Buildcon gained 3% to 12%.
The changes to the exit policy aren’t the only improvements being made in the policy environment for the roads sector. NHAI has recently also introduced the “hybrid annuity model” to develop road projects, which significantly reduces the equity contribution of the concessionaires. Further, the government is proposing a number of changes to the model concession agreement for BOT road projects. These include:
- Increasing the ceiling of contribution by NHAI to a maximum of 40% of the project cost (up from 20%), which should have the effect of easing the financial pressure on concessionaires;
- Allowing deemed termination for projects where conditions precedent are not fulfilled within one year of signing the concession, allowing concessionaires to get out of projects that are having trouble getting off the ground; and
- Permitting refinancing of road projects, whether entirely or in part, enabling concessionaires to replace expensive early stage debt with cheaper financing.
Akshay Jaitly is a partner at Trilegal and Samkit Sethia is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.