What is the rationale of such authorizing the Fund?
In October 2017, the Government of India launched the Bharatmala Pariyojana, the flagship highway development program of the Government of India for development of 24,800 km of roads for a total investment of INR 5,35,000 crore. Given the magnitude of this program, the Nation Highways Authority of India (NHAI) would need adequate funds to complete the projects within the prescribed timelines. Accordingly, the Union Cabinet proposed that national highway assets be monetized to unlock their value and attractive schemes be offered for investment by private players in construction of National Highways.
What was the authorization granted by the Cabinet?
- The Union Cabinet gave its approval to the Ministry of Road Transport and Highways' proposal, which authorized the NHAI to set up Infrastructure Investment Trust(s) (InvIT) as per the guidelines issued by the Securities and Exchange Board of India (SEBI).
- This move will enable the NHAI to monetize completed national highways that have a toll collection track record of at least one year. NHAI would reserve the right to levy toll on the identified highway.
How is the InvIT proposed to be implemented?
- The Finance Minister, in his budget speech for the year 2018-2019 had indicated that the NHAI must consider organizing its road assets into Special Purpose Vehicles ("SPV") and use innovative monetizing structures like Toll, Operate and Transfer model and InvITs.
- Accordingly, NHAI has been actively working on setting up an InvIT to monetize its completed and operational national highways projects with the objective of mobilizing additional resources through capital markets.
- The InvIT would be a Trust established by NHAI under the Indian Trust Act, 1882 and the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014.
- The InvIT would be formed with an objective of investment primarily in infrastructure projects (as such term is defined by the Ministry of Finance).
- The InvITs can hold assets either directly or through an SPV or a holding company.
Our view: As highlighted by the Cabinet, it was inevitable that new and innovative financing vehicles would be required to be used for organizations like the NHAI, that which have limited existing sources of funds. The proposal to set up InvITs should provide greater flexibility to investors. The move is expected to create many opportunities like:
- Providing greater flexibility to investors and attracting patient capital (maybe 25-30 years) to the Indian highway market. This is good news for risk averse investors who are looking at long term returns.
- Generation of specialized O&M Concessionaires;
- Attracting patient capital (for say 20-30 years) to the Indian highway market; and
- Retail domestic savings and corpus of special institutions (such as mutual funds, PFRDA, etc.) to be invested in the infrastructure sector through InvIT.
- The monetization of highways will have a multiplier effect for other sectors of the economy.