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«INFRASTRUCTURE & ASSET FINANCE SUMMIT, 2012 – TETE A TETE The Indian Infrastructure industry witnessed a gathering of the market players brain ...»

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VINOD KOTHARI CONSULTANTS PVT LTD

INFRASTRUCTURE

&

ASSET FINANCE SUMMIT, 2012 –

TETE A TETE

The Indian Infrastructure industry witnessed a gathering of the market players brain

storming the prospects, challenges, issues, concerns and way forward of the

infrastructure & asset finance industry in India. The 6th-7th September, 2012 at the

Sunville Banquets, in Mumbai witnessed one of the critical rendezvous of the stakeholders concerning the industry. The present Report captures the mood, motion and message of the market.

Contents GENESIS OF THE SUMMIT

PROGRESS OF THE SUMMIT

DAY 1: 6TH September, 2012

Session 1: The Keynote Session

Session 2: Capital and leverage options

Session 3: Critical Infrastructure and Asset Finance Sectors

Session 4: Whither Asset Finance?

DAY 2: 7th September, 2012

Session 1: Policy snags and bottlenecks in infrastructure financing

Session 2: Financing for Road and Other sectors

Session 3: Power sector and General debt funding options

Session 4: Telecom infrastructure financing; shipping and ports; sector risk assessment

KEY ISSUES DISCUSSED AND KEY TAKEAWAYS FROM THE SUMMIT

Websites:

GENESIS OF THE SUMMIT

Development of infrastructure sector and infrastructure financing is sine quo non to the growth prospects of the country. It is trite to say - the key to economic resurgence of India is development of the infrastructure sector. However, it has been a common issue that there is a complete policy paralysis and things do not move in the sector. In several sectors of infrastructure, it is seen that, operators are making a beeline for corporate debt restructuring as they are not able to meet up the obligations to their lenders.

Needless to say, the most critical issue is cash. Cash is not moving from the receivables, and cash is not being moving back to the lenders. Raising capital as well as raising debt sounds very difficult in the current scenario. The policy makers have come up with various options such as infrastructure bonds, infrastructure debt funds, alternative investment funds, and so on, but none of them seem to be moving cash into the sector. In the field of asset finance, NBFCs have shown impressive growth, but are currently facing rising NPAs and slowing growth pace.

In this scenario, we at Vinod Kothari Consultants P Ltd, felt the need of bringing together the infrastructure operators and financiers to a common forum on 6-7 September, in Mumbai. Through the Infrastructure and Asset Finance Summit we brought together the stakeholders in the asset finance and infrastructure finance space to discuss what are the critical issues facing the sector; to explore issues like – foreign capital, debt and equity funding, credit enhancements, leverage issues, and problems facing critical sectors like power, roads, telecom, urban infrastructure, aviation, and shipping. The Summit was organized to take a stock of these developments.

PROGRESS OF THE SUMMIT

DAY 1: 6TH September, 2012 Ms. Nidhi Bothra, Executive Vice-President of VKCPL, delivered the welcome address to the Summit and declared the summit open.

Session 1: The Keynote Session First session of the first day of the Summit was the Keynote Session that addressed issues like the growth history and the growth prospects of the infrastructure companies in India, overview of the asset finance industry in the country, a view of the whole of the landscape of Indian infrastructure finance and asset finance followed by floor discussions.

Mr. Sunil Kanoria, the Vice-Chairman of Srei Infrastructure Finance Limited, one of the pioneers of infrastructure finance in the nation, deliberated on how infrastructure and asset finance have contributed and are contributing to India’s resurgence.

Mr. Shiva Rajaraman, General Manager& Head - Strategic Initiatives in L&T Infrastructure Finance Company Limited, narrated the growth history of an IFC as a Public Financial Institution. The essence of a PFI, as emphasized by the speaker is trust and corporate governance. The making of a PFI may be compared to making of a movie where the stage is India, the plot is India, initial success is asset buildup, income generator is promoter, director is shareholder, and funding comes from banks, ECBs, retail bonds, pension funds. The growth stages of an IFC were wisely depicted by Mr.

Rajaraman.

Mr. Mahesh Thakkar, the Director General of Finance Industry Development Council presented an Overview of asset finance industry. One of the key questions the speaker focused on was the reasons behind NBFCs as a better option for asset financing, major ones as identified by the speaker are product innovation, provision of prompt and tailor made services and ability to cater to a class of borrowers who are “unbankable” and do not have necessarily high income. However, issues concerning the NBFCs in the field were also highlighted, for example, in India, the focus has always been on “regulation” of NBFCs instead of “development” of NBFCs. Other aspects like funding, taxation and recovery mechanisms were also discussed. The speaker also pressed upon the need for a Policy Statement from the Government of India spelling out in clear terms that NBFCs are a part of the mainstream financial sector as well as a need for a supportive environment.





Infrastructure sector is a capital-hungry business, views Mr. K. K. Mohanty, the Managing Director of Gammon Infrastructure P Ltd. On the equity front, there is no way forward as such: take sponsor’s equity or investor equity, there are issues. When it comes to debt funding, all roads seem to be blocked: take domestic route or the ECB route; debt raising options are limited owing to regulatory and policy issues mainly. The speaker also pin-pointed sector based issues. So, promoting capital creation and building investor confidence was identified by the speaker to be the need of the hour.

Session 2: Capital and leverage options

RBI came up with new Securitisation Guidelines recently in the month of May, 2012. Mr. Vinod Kothari, the CEO of VKCPL, deliberated on raising funding by Securitisation in the new scenario.

The new Guidelines resolve most of the issues created by the earlier 2006 Guidelines. The speaker dealt in detail with the major provisions of the new Securitisation Guidelines, but also raised and simultaneously resolved some critical questions, e.g. whether Securitisation means no capital relief or whether the direct assignments are going to dry out and similar such questions.

Mr. Darius Pandole, Partner in New Silk Route Advisors Pvt. Ltd., while talking about private equity investments in infrastructure, presented a mixed report card for the status of infrastructure in India. The speaker opines that infrastructure development is one of the biggest economic challenge and one of private equity’s biggest opportunities owing to improving macro fundamentals, growing policy liberalization and increasingly larger role of the private sector. Attractiveness of the infrastructure sector to the PE investors was also evaluated by the speaker.

State of Infrastructure in India is bleak, as demonstrated by Mr. Amit Vora, Associate Director – Financial Services in CRISIL Infrastructure Advisory. Infrastructure is the largest and fastest growing sector drawing bank credit. However, banks face constraints and challenges to fund infrastructure.

Therefore, alternate sources of infrastructure debt finance needs to be encouraged to relieve the pressure on the banking system. One of the innovative funding solutions for infrastructure is Credit Enhancement through a Partial Credit Guarantee (PCG) which can help infrastructure entities to access bond market. Mr. Vora demonstrated how the PCG will help the stakeholders-issuer, investors, banks and the guarantor.

Session 3: Critical Infrastructure and Asset Finance Sectors

The fate of Commercial Vehicle industry is linked to economic growth, and the industry would continue to grow, the view was put forward by S Sridhar, Bank funding, NBFCs, and local financiers finance 90% of the sales in CV industry. NBFC business model overcomes the challenges faced by the banks viz. risk management and service; however there are funding challenges before NBFCs like market borrowing, securitisation/assignment and ECBs.

With mass urbanization, and expected hike in urbanisation in the coming years, the development of urban infrastructure has become a major issue. Mr. Ashish Kale, Director and Mr. Wasim Merchant, Assistant Vice President of Infrastructure Banking Group, Yes Bank deliberated on the topic urban infrastructure with focus on waste and water management. The urban water sector value chain was described with the associated risks. The speakers pointed out that historically the sector has been plagued by a vicious circle of non-sustainability, which has given rise to a gap between what was “required” and what got “delivered”. However, the PPP model has been tried across a few places to bridge the gap, of which the speakers made a mention of some noteworthy PPP projects in India. Still, there are challenges-both from the lender’s and systemic perspective.

Similarly, the speakers deliberated on solid waste management.

Mr. Sudip Datta, Senior Vice President & Divisional Head - Operations in IL&FS Infrastructure Development Corporation Ltd also presented his views on urban sector in India, JNNURM mission programmes, private sector funding, PPP in urban sector, Structured Mezzanine Credit Facility (SMCF), Urban Transport Fund. The speaker remarked that the core issue in urban sector is transportation.

Session 4: Whither Asset Finance?

Mr. NDS Chari, Head of Key Accounts and Partnerships in SREI BNP Paribas deliberated his views on whether the present lull is going to continue for long in the construction equipment sector. The immediate scenario witnesses lack of policy decisions, increase in the number of companies going for restructuring, tight liquidity conditions, lack of confidence and poor perception. However, from a medium to short term view, the infrastructure growth seems to continue. The speaker presented strategies to handle the situations arising in short term, medium term and long term as well.

Mr. Timothy Biddle, Business Development Manager & Product Development Head in Siemens Financial Services, drew a line of demarcation between the asset financing market in India and in Europe in terms of market size, asset finance penetration, product composition, financing markets, lender profile, and buyer behavior. The speaker also presented an outlook of asset finance market development from 2011-17.

Ms. Shilpa Pophale, the Managing Director of Electronica Finance Limited, shared the experience of EFL in SME Funding. The speaker pointed out while MSMEs are seen as most risky and vulnerable segment to finance, the reality is MSME is most comfortable and dependable segment to finance provided the customers are selected and served carefully. There are several issues with MSMEs relating to marketing, infrastructure, etc. but the same can be handled by emphasizing on customer needs, knowledge of the asset and end-user of the customer.

Emerging perspectives of SME Funding were discussed by Mr. Anindo Mukherjee, Head, Legal & Compliance Department & Chief Risk Officer of Fullerton India. Opportunities across SME financing were put forward and the concerns behind asset-backed lending were also raised. The speaker pointed out the key objective of SME Risk strategy: to align credit policy and risk appetite to maximise economic revenue and risk adjusted return. Various other aspects like customer due diligence, account monitoring, customer assessment approach,etc were also discussed.

Credit Perspective on NBFCs in India was discussed by Mr. Rajesh Mokashi, Deputy Managing Director of CARE. While talking about the rating methodology of CARE for NBFCs, the speaker pointed out the key factors that are examined, namely capital adequacy, asset quality, resource base, liquidity, earnings quality and that the financial Performance is assessed based on absolute numbers, trends and volatility in their performance. Performance trends of NBFCs were evaluated on the basis of capital adequacy, asset quality and earnings.

DAY 2: 7th September, 2012 Session 1: Policy snags and bottlenecks in infrastructure financing The first session on Day 2 aimed at uncovering the policy snags and bottlenecks in infrastructure financing.

Policy issues in infrastructure in respect of consistency and reforms and international experiences were raised by Mr. Ashwini Kumar, Head – Risk Management of Srei Infrastructure Finance Ltd.

There are funding challenges for infrastructure in India, but several measures have been taken by the Government: PPP projects, FDI in infrastructure sector, setting up of IIFCL, IDFs to name a few.

RBI has also taken initiatives in this regard including liberalization and rationalization of ECB policies. However, we need more reforms and consistency in policies to face the challenges, the major challenge being making the infrastructure project commercially viable.

Coming to the telecom business, 122 telecom licences were cancelled triggered by the 2G judgment of the Apex Court, but as a side effect comes regulatory uncertainty, as pointed out by Mr. Santosh Janakiram, a Partner in Amarchand & Mangaldas & Suresh A. Shroff & Co. The uncertainty is because the judgment did not deal with the lender’s rights. Interestingly, even the legal due diligence could not have unveiled the ‘defects’ in the licenses. The speaker also presented legal perspective of fuel supply and transportation issues in the infrastructure sector, e.g. rigid mining regulations proposed in Indonesia and Australia are affecting the imports of coal.

Mr. Manikkan Sangameswaran, President – Infrastructure in ICICI Venture, deliberated on Infrastructure Private Equity and gave his observations as to why the infrastructure assets are liked by the investors. The speaker holds that evolution in the policy framework and regulatory oversight for infrastructure has created an enabling environment for private sector investment in India

Session 2: Financing for Road and Other sectors



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