Why did banks ‘over-finance’ road projects, asks Parliamentary panel

SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

Observing that loan disbursed by banks in excess of an estimated project cost is “strange”, a parliamentary panel has expressed concern over a large chunk of about Rs 75,000 crore of loans extended to the road sector turning bad. In particular, the panel has raised questions about huge loans advanced to Jaypee Infratech turning into NPAs.

“Some of the banks have given information on total loan (Rs 74,088 crore) given to the road sector… for IDBI, the NPA percentage is as high as 52 per cent of loan disbursed for the road sector. The committee wants to know the reason why this huge amount has become NPA, that too to a single concessionaire, Jaypee Infratech Ltd,” the panel chaired by Kanwar Deep Singh said in its latest report.

Seeking full details of the project awarded to Jaypee, the 33-member standing committee on transport further observed that State Bank of India has lent Rs 19,502 crore out of which Rs 1,986 crore has slipped into NPAs. SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

The panel said, “The committee finds it strange as to how the concessionaire who has got a project for Rs 1,000 crore gets Rs 1,400 crore for the same project.” It also asked: “Why the concessionaire has been given a free hand to get the bank’s loan as per their wish?” It instructed NHAI to keep a watch on the excess loan amount obtained by the developer.

Incidentally, former road transport and highways secretary Vijay Chhibber has remarked that aggressive lending by banks which were “happily over-financing even non-serious highway players without assessing risks has virtually killed the sector”.

He told media, “The concessionaires and bankers are not realising that we are reaching a stage of impatience, and people who are users of these roads are not going to be waiting anymore.” Projecting that total NPAs of Rs 2.6 lakh crore may go up to Rs 4 lakh crore because of defaults, the panel recommended that banks be empowered more to make recovery of bad debt.

Asking the government to consider empowering the banks adequately to make recovery of bad debt easier, it said, “For example, in the case of a default, the banks may be allowed to take over the entire company.”

It also noted SBI’s contention that all approvals from statutory authorities and clearances from government agencies should be obtained before a particular project is sent for bidding. “Another area of discord is the project cost estimated by NHAI and the concessionaires, which results in lending delay by financial institutions,” the committee said.

Valuation disconnect, delay in approvals stall road deals

Road deals are rising but despite an easing of norms for such sales, many deals are taking longer to conclude

Three years ago when IVRCL Ltd announced the sale of three highways it built at a cost of Rs.2,200 crore in Tamil Nadu, shares of the debt-laden infrastructure company leapt 13%.

Cut to the present and its deal with Tata Realty and Infrastructure Ltd (TRIL) has still not concluded, and IVRCL shares are languishing at a fraction of their 2013 highs. Despite several assertions from both parties that the deal is still on, it is still to close, since some preconditions have not been achieved.

Hyderabad-based IVRCL’s predicament will be familiar to the promoters of more than 60 road builders in India who want to sell projects, raise money, reduce debt and pick up new projects that are coming up. The situation also threatens to undermine the government’s grand plans to more than double the number of road project awards in the current fiscal year.

IVRCL chairman Sudhir Reddy did not respond to phone calls and messages and TRIL did not respond to an email.

Road sector deals are rising but despite a relaxation in norms for such sales last year, many deals are taking longer to conclude as buyers and sellers bicker over valuations, lenders refuse to accept losses, and due to delays in getting approvals from the National Highways Authority of India (NHAI).

“The reason for deals not going through in the roads and highways sector is the valuation disconnect between the buyer and seller due to the difference in estimates of WPI (Wholesale Price Index) and traffic growth. Also, in certain stressed cases, it seems buyers want bankers to take a haircut as well, which is still not happening,” said Rohit Singhania, vice-president and fund manager, DSP BlackRock Investment Managers Pvt. Ltd.

India has set a target to award 25,000km of road projects in 2016-17, compared with 10,000 km achieved in 2015-16.

Struggling infrastructure firm Supreme Infrastructure India Ltd has also been looking to sell its operational road assets to raise money for its delayed or under-construction projects amid cost overruns and high interest costs. “It’s a buyers’ market and there are many assets available to choose from,” said Vikram Sharma, managing director, Supreme Infrastructure. “All the developers have got into stress and every quarter, there is a feeling that there is a better situation for a distress sale. So, buyers wait.”

Similarly, IL&FS Transportation Networks Ltd (ITNL), the company with the largest build, operate and transfer (BOT) roads portfolio, has been in discussions with potential buyers, including private equity firm I Squared Capital, for the sale of its certain annuity road assets, Mint reported in April. But a deal is still not in sight. A year ago, the company had said it has a target of monetizing a few road assets in two quarters’ time. ITNL did not respond to an email seeking comment.

Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company, has also said several times in the past few years that it is looking to monetize its operational road assets—either by a sale or through an infrastructure investment trust (InvIT). L&T is now working on a deal with Canadian pension fund CPPIB for these assets, Mint reported on 13 July.

“M&A in roads have picked up only in the last three years, and increasingly, it’s taking longer for deals to complete. The life cycle of a deal, from the time of term sheet signing to closure, has increased to four-to-six months, which is very high,” said Ashish Agarwal, director, infrastructure at investment bank Equirus Capital Pvt. Ltd.

“Delays are due to external reasons, including need for NOCs (no objection certificates) from NHAI, other lenders and also from stakeholders at the project or the holding company level. And within this time frame, if key project variables undergo a change, it can lead to renegotiations,” he said.

Some of the deals announced in 2015 could be concluded this year, Equirus’s Agarwal said.

It took seven months of hard bargaining for Gammon Infrastructure Projects Ltd to sew up a deal to sell a portfolio of nine projects—six roads and three power plants—to Canada’s Brookfield Asset Management last year, and several more months before money changed hands.

On the other side, Piramal Enterprises Ltd, controlled by billionaire Ajay Piramal, which said in 2014 that it was looking to buy a number of road assets, is yet to announce a deal.

Eight mergers and acquisitions and PE deals worth $315 million have been announced so far in 2016, compared with six deals worth $125 million during the same period in 2015, according to data from Grant Thornton Advisory Pvt. Ltd.

The infrastructure fund of multi-asset manager IDFC Alternatives has been one of the most active buyers of operational road assets in India, ahead of peer investors including US-based I Squared Capital and Canada’s Brookfield Asset Management.

“A lot of deal flow is starting to happen but a lot of investors are not aware of the long-drawn process and the patience these acquisitions entail... Our experience is that there are transactions that have gone down very smoothly and in a timely manner; but at the same time, there are a couple of transactions which have taken more time than we had expected,” said Aditya Aggarwal, partner at IDFC Alternatives.

In several instances, due diligence of assets itself throws up negative surprises leading to the collapse of talks, Aggarwal said.

While traffic growth and investor sentiment has revived, several companies continue to be stressed from previous years’ aggressive expansion. Highway developers that are labouring under debt, and dealing with lower-than-expected cash flows on completed projects and issues related to land acquisition on some incomplete ones will need refinancing to the tune of Rs.8,450 crore, India Ratings and Research Pvt. Ltd said in a June report.

About Rs.25,500 crore worth of project-level debt across 37 BOT projects, some under construction and others complete, could be under stress, the ratings agency said.

DLF pushes ahead with REIT listing plans

Suncapital: Country’s largest real estate firm by market capitalisation is gearing up to launch REITs worth up Rs6,000 crore in two tranches over the next two years

DLF is currently putting together commercial office assets totalling around 25 million square feet of land into the REITs portfolio

Mumbai: Pushing a step closer to launching India’s first Real Estate Investment Trust (REIT), real estate firm DLF Ltd expects to complete forming a special purpose vehicle (SPV) within the next six months, said a top company executive of the Delhi-based company.

“We would be ready with the SPV in the next six months. As we announced earlier, we have signed non-disclosure agreements with 25 global investors. We should be the first one to crack it (REITs),” Rajeev Talwar, chief executive officer (CEO), DLF Ltd, told Mint over the phone.

Country’s largest real estate firm by market capitalisation is gearing up to launch REITs worth up Rs.6,000 crore in two tranches over the next two years.

REITs are listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors and listing them on stock exchanges as trust. Investors earn return on investment either through value appreciation or rental income generated from commercial assets.

REITs will also give overseas investors a chance to invest in lease rental generating assets, an asset class otherwise prohibited for foreigners.

DLF is currently putting together commercial office assets totalling around 25 million square feet of land into the REITs portfolio. As part of the process, promoters of DLF have decided to sell around 40% of its stake in DLF Cyber City Developers Ltd (DCCDL), a rental arm of the company to institutional investors. DCCDL earns around Rs.2,200 crore a year from rentals.

“Basically what is going on right now is divestment (of commercial portfolios) and to get foreign investors into the REIT portfolio. They have to come in the fair market valuation. In the first two quarters of the year, we would have brought all the funds and complete with our first stage which is to form an SPV,” Talwar said.

The listing of REITs, which many believe would bring stability and attract funds to the sector, has not been able to take off mainly due to tax hurdles.

Finance minister Arun Jaitley in the Union budget on Monday proposed to exempt REITs from the purview of dividend distribution tax (DDT), removing a significant hurdle to floating it in India.

“Exemption of DDT on REIT along with the FDI (foreign direct investment) policy changes in December last year will help get huge inflows from foreign institutional investors. For foreign institutional investors, the taxation was making it a lower return product for them. Now this (exemption) increases return and thereby attract more inflow of funds,” he said.

Anuj Puri, chairman and country head of JLL India, said with the proposal to remove DDT, REITs would become a realty soon with few listings likely to happen this year either by financial institutions or developers.

“Currently, around 229 million sq. ft of office space can be seen as REIT-compliant. If we assume that even 50% of these get listed, we are looking at a total REITs listing worth $18.5 billion,” Puri said.

Sun Capital Advisory Services