Matching the speed of economic growth, the government has made infrastructure development a priority. It has taken legislative and policy initiatives to promote growth in the infrastructure sector, and the allocation of about US$82.48 billion to the sector in the Union Budget for 2018-19 is reflective of its resolve.
In 2017, the sector recorded 91 M&A deals valued around US$5.4 billion. As per present estimates, this number has been surpassed in the first half of 2018 alone. Power and roads have been the focus of deal activity.
Policy initiatives: The government has introduced various sector-specific policies to boost investment. In 2015, it allowed easier exit options for developers of road projects, and they are now permitted to divest up to 100% of their equity after two years from completion of construction. Debt-laden developers have thus been able to monetize assets, and this has given a push to the M&A activity.
Setting up of charging infrastructure for electric vehicles (EV) is an upcoming sector, which is likely to witness M&A activity. Under phase two of the Faster Adoption and Manufacture of (Hybrid and) Electric Vehicles scheme, the government is expected to provide about US$138 million for development of such infrastructure. To attract investment and increase production in the oil and gas sector, the government has recently introduced policies, such as the Hydrocarbon Exploration and Licensing Policy, the policy for extending existing production sharing contracts, and the policy for incentivizing the use of enhanced recovery measures.
Insolvency code: Enforcement of the Insolvency and Bankruptcy Code, 2016 (IBC), has given significant impetus to M&A and restructuring activity across different sectors, particularly power, steel and cement. These sectors are capital intensive, and projects have long lead-ins, which has led to the mounting of stressed assets. IBC prescribes a detailed framework for the resolution of insolvency cases and provides for the sale of insolvent businesses. Consequently, stressed assets which have become available for acquisition, have opened up new M&A opportunities.
Sectoral consolidation: Consolidation of domestic businesses has also spurred M&A activity. Tariff pressure and tendering of fewer projects have prompted a consolidation in the renewables sector. Some of the large public-sector undertakings in oil and gas have consolidated due to the volatility of crude oil prices and low refining margins. In the Union Budget for 2017-18, the government proposed consolidation of public sector oil companies into an “oil major” to match the performance of large international and domestic private oil and gas companies. The move was proposed to improve performance, risk management capacity and competitiveness against international players.
Major consolidations this year include the Idea-Vodafone merger, ONGC’s acquisition of Hindustan Petroleum Corporation Limited, ReNew Power’s take-over of Ostro Energy and Adani’s acquisition of Reliance Infra.
Improved ease of doing business: The World Bank’s Doing Business, 2018 report ranks India at 100, up from the previous year’s position of 130. India has been recognized for improvements in areas such as starting businesses, dealing with construction permits and enforcing contracts.
Recent amendments to the Specific Relief Act, 1963, have been introduced to aid the timely enforcement of infrastructure project contracts and prevent delays due to breach or injunctions sought by parties. Continued efforts by the government to improve the ease of doing business is likely to make India a more attractive destination for foreign investment, and give further impetus to cross-border M&A.
M&A activity and restructuring in the energy and infrastructure sector are likely to continue, mainly due to policy and legislative initiatives. We foresee major acquisitions in the roads and highways sector as consortium members look to exit completed projects, thus reallocating capital to new projects.
The renewables sector is likely to witness consolidation and participation from international investors (both strategic and financial) given India’s ambitious target of adding 175 GW of renewable power by 2022. Significant incentives being offered for the development of charging infrastructure for EVs and the government’s focus on increasing the use of clean energy in the transportation sector are expected to spur investment in these sectors.
While industry players may exercise caution as the 2019 general election approaches, the momentum gained because of the availability of stressed assets is likely to be unaffected.
Venkatesh Prasad is a partner at in the Gurugram office of J. Sagar Associates. His views are personal.
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