I Introduction

1. The development of infrastructure is the backbone of the economic growth and stability of any country. The infrastructure sector in India is receiving intense focus from the government and is witnessing the advent of many alternative and long-term funding avenues in addition to traditional sources. This increased impetus to develop infrastructure in the country is attracting both domestic and international players.
    
2. On 26 and 27 August 2021, the India Infrastructure magazine supported by India Infrastructure Finance Company Limited (IIFCL) organised their 12th Annual Conference on ‘Infrastructure Finance in India: Current Scenario and Future Strategies’. Singularity Legal and FTI Consulting India were the knowledge partners of the event.
    
3. The discussion was held between and attended by the who’s who of the infrastructure industry. The conference witnessed participation by several senior-level decision-makers, representatives and thought leaders from both domestic and international infrastructure companies, banks, infrastructure fund managers, institutional investors,  law firms, litigation funders, private equity firms, credit rating agencies, infrastructure project contractors, state financial corporations, asset reconstruction and management companies, technology and equipment providers, and finance and valuation consultants, all keen to hear the panellists’ insights on how the coming years will unfold for infrastructure finance in India.   

      II Discussion

4. The conference included four-panel discussions, moderated by Mr. Prateek Bagaria, Partner at Singularity Legal, on the following themes:

5. The panel consisted of –

1. Mr. Harshal Mhavarkar – Vice President (Project Finance & Structuring), SBI
2. Mr. Prashant Murkute – Senior Vice-President & Group Head, Axis Bank
3. Mr. Ritesh Sampat – Executive Vice-President & Head, Debt Capital Markets & Project Financing Investment, HDFC
4. Mr. Arvindran Manoosegaran – Investment Manager, Omni Bridgeway

6. Mr. Bagaria set the ball rolling by elaborating on the significant role played by lenders in India’s infrastructure finance, active steps being taken by the government, and financing commitments made by international organisations, such as the World Bank and the Asian Infrastructure Investment Bank. He noted that RBI attributed the 6% contraction in the banking sector in FY21 to the bad debt overhanging India’s infrastructure segment. This has led the Indian market to look beyond banks to fund infrastructure projects.
    
7. Mr. Bagaria then invited representatives of three of the largest banks in the country – Mr. Murkute from Axis Bank, Mr. Mhavarkar from SBI and Mr. Sampat from HDFC, to share their insights on how they perceived the current scenario in infrastructure, particularly since the outbreak of COVID-19.
    
8. Mr. Murkute noted that the focus of lenders has shifted from the Build-Operate and Transfer (BOT) model to Hybrid Annuity Model (HAM). The HAM is a combination of Engineering, Procurement and Construction (EPC) and BOT Annuity models. In the HAM, both government and private parties share the total project cost in a 40:60 ratio, respectively, and the responsibility of getting regulatory clearances rests with the government. He added that currently, lenders are adopting a measured risk approach in the infrastructure space depending upon the multiple of the debt that is getting financed to the multiple of the base traffic (i.e., debt/EBITDA ratio).
    
9. In the construction sector, Mr. Murkute pointed out that lenders would prefer developers taking equity commitments for their new projects in the range of 2.25x-2.5x of the current EBITDA. Despite the unprecedented pandemic, roads and ports have done relatively well with profit margins in the range of 68-70%. The success of Real Estate Investment Trusts (REITS), Infrastructure Investment Trusts (InvITS), Infrastructure Debt Funds (IDFs) and international green bonds in India, as per Mr. Murkute, has provided a good opportunity to churn the portfolios and capital in the infrastructure space.
    
10. Mr. Mhavarkar believes that the stance of the lenders is moving from cautious to optimistic. This is attributable to the changing macro factors. The government is creating a conducive environment for the infrastructure industry with measures such as changing model construction agreements, relaxing bidding criteria to foster competition and implementing fast-tags. The National Infrastructure Pipeline has given direction and vision to major investments in the industry. He then noted that the classic promoter equity is being replaced by private equity and funds, which has given comfort to lenders from governance perspective.
     
11. In relation to the effect of COVID-19 on the infrastructure sector, Mr. Mhavarkar stated that a 6% contraction in the credit deployment during such a black swan event of the pandemic is a positive sign rather than a setback. He noted that credit deployment can be increased by cleaning up the stressed balance sheets.
     
12. Mr. Sampat agreed with the views of Mr. Mhavarkar and Mr. Murkute regarding the problems faced by the banks on several fronts in the last decade. As per Mr. Sampat, three key pillars that instil confidence in banks to finance a particular project are – (i) financial independence or viability of the project; (ii) availability of land and regulatory clearances; and (iii) equity visibility and execution capability of the developers. Mr. Sampat highlighted the inherent benefit of InvITS in terms of the availability of pooled mechanism as compared to a standalone infrastructure project which only has a single source of cash flow. This is a positive development for both lenders and developers. For lenders, because of the pooling mechanism, the right size of debt and refinancing of debt to align with the cash flows of the project. For developers, because it releases his equity that can be re-deployed in new projects.
     
13. When asked about the steps being used to tackle the problem of the stressed balance sheet, Mr. Mhavarkar commented that banks have started asking for higher upfront equity, ensuring tighter monitoring of assets by way of deploying asset monitoring companies that have become the eyes and ears for the banks, and prioritising right debt sizing.
     
14. Mr. Murkute spoke about the expectations from the policymakers and the government – better and faster dispute resolution process, honouring of contractual commitments, timely injection of funds in state projects and reduction in the working capital cycle. Adding to the challenges of the dispute resolution process pointed by Mr. Murkute, Mr. Bagaria noted that the biggest beneficiary of the lack of efficiency of the Indian judicial system is the Indian government itself as it is the biggest defaulter. He underscored that the biggest problem lies in recovery. The need of the hour is to focus overseas and the innovation lies in internationalising recovery by understanding the situs of the debtor’s debt and ascertaining the potential avenues. Recently, Cairn and Vodafone has employed this innovative technique and got the overseas assets of the Indian government frozen. As per Mr. Bagaria, the reasons why banks do not pursue overseas recovery is due to lack of overseas branches, lack of experience, further strain on balance sheets due to the involvement of significant costs. No one prefers spending good money after bad money.
     
15. Mr. Bagaria then segued the discussion towards how litigation finance can help banks with these problems and invited Mr. Mansoogeran to explain it further. Mr. Mansoogeran described that in terms of NPAs, it can provide two solutions. The first is the monetisation of NPAs either by a wholesale or partial purchase. This makes the litigation funder the legal owner of the NPA portfolio. Then it acts as a resolution or enforcement service provider by financing and managing the legal recovery of NPA. This allows the lenders to remove those NPAs from their balance sheets. Further, the litigation funder works on a success-fee basis.
     
16. The second solution is the funding and management of disputes, both arbitration and litigation proceedings as well as the enforcement of awards against the debtors directly. At this stage, the bank can further benefit from the global presence, expertise and creative strategies employed by litigation funders in terms of asset trace and investigation. Mr. Mansoogeran gave examples where Omni Bridgeway was able to get a freezing order on an apartment owned by the mistress of the debtor and one where it used its long-standing diplomacy experience in recovering from a sovereign debtor. He remarked that the companies regularly come up with creative ways of funnelling the money to jurisdictions that are out of the reach of lenders and thus, the investigation teams of litigation funders pierce the corporate veil and come up with equally creative solutions.

17. The second panel consisted of –

1. Mr. Rahul Chhaparwal – Executive Director, Special Situation Funds, Kotak Investment Advisors
2. Mr. Sanjeev Pandey – Deputy General Manager, Stressed Asset Recovery Group, SBI
3. Mr. Badrinath Durvasula – Managing Director, Legal, Essar Group
4. Mr. Marijn Flinterman – Head of MENA DARP, Omni Bridgeway

18. Mr. Bagaria opened the second discussion by listing key agendas from this year’s Union Budget, terming it the “infrastructure budget”, due to its massive focus on the sector with the aim to pull our economy out of the current recession. He remarked that the success of the tall order set by the government would rely heavily on effective implementation, turnaround times and constant monitoring. In the background of India’s increasing NPAs and poor global performance in logistics, Mr. Bagaria stressed on the need to first address fundamental problems, which have been exacerbated by the unprecedented pandemic. Since early 2020, infrastructure financing companies’ share in infrastructure credit has increased to 53%. Such credit growth needs to be avoided and requires the primary attention of regulators, bank boards and credit-dispersing functionaries. Mr. Bagaria then invited the panellists to share their views on the current scenario of the stressed infrastructure assets in India.
     
19. Mr. Pandey highlighted the difficulties being faced by various banks, including SBI, in recovering loans. Around 30-35% of the NPAs in SBI’s books are from the infrastructure sector, especially EPC, power and road. Despite being a part of the IBC Drafting Committee, and later, the IBC Suggestions Committee, he opined that the IBC has been largely ineffective for infrastructure dispute resolution. Due to COVID-19, the valuation of assets has also gone down and thus resolutions plans are not being approved by the Committee of Creditors. This has resulted in banks taking heavy haircuts in their recovery or agreeing to compromise by way of one-time settlement offers by the borrowers. Even the RBI’s framework for resolution of stressed assets has not been a success. Thus, banks have started creating SPVs, specifically for recovery purposes, to isolate risk and reallocate assets to investors.
     
20. Agreeing with Mr. Pandey, Mr. Chhaparwal added that though there has been a rise in the demand for power, power purchase agreements (PPA) continue to be one of the main areas where difficulties are faced by lenders. The government has constantly reneged on its commitment to honour PPAs. Disputes continue to arise regarding the invocation of performance guarantees and bank guarantees once the account is declared as an NPA.  Here, Mr. Bagaria pointed out that India is not the only country where PPAs have been withdrawn or changed. A flurry of litigation and investment arbitration has been seen in Europe, against countries like Spain and Ukraine. This may very well be the future of the Indian market, if right steps are not taken by the government.
     
21. Discussing the impact of COVID-19 on the already stressed assets, Mr. Durvasula first explained that there exists a chain in the infrastructure industry because of contracting, sub-contracting and sub-sub-contracting.  Disturbance caused at any level cascades and ultimately impacts all players in the chain. COVID-19 has compounded all the problems that were earlier faced at different time and levels of the chain. Moreover, getting institutional financing has become difficult since the pandemic begun, as lenders have become scrupulous and assign higher charges on the assets. Reflecting on the same topic, Mr. Chhaparwal spoke about the major impact of COVID-19 on the hotel industry and on the road sector due to significant drop in toll collection.
     
22. Mr. Bagaria brought up the newly introduced “pre-packs”, which allow resolution through a direct agreement between creditors and the owners, mentioning how it is like a hybrid of the one-time settlement offers and CIRP. Mr. Chhaparwal and Mr. Pandey noted that introduction of pre-packs and insolvency of personal guarantors post the Supreme Court judgment in Lalit Kumar Jain v. Union of India, has brought some optimism towards in terms of recovery. SBI is the first bank to come out with a policy on pre-packs. With no public announcements there is less obstruction by creditors and better valuation of assets. Thus, this process is preferred among the lenders. However, currently, pre-packs are only available to MSMEs. Speaking from a promoter’s perspective, Mr. Durvasula compared the recent judgments related to insolvency of personal guarantors to fundamental rights – everyone has them but it isn’t often practically enforced. He stressed on the long-standing relation between a promoter and the company, where the success of the latter is dependent upon the personal risk-taking capacity of the former. He believes that this relation may get hampered if insolvency is initiated against the promoters in any and all cases.
     
23. Taking cue from the systemic problems put forward by the panellists, like the poor functioning of regulatory bodies and dispute resolution mechanisms, Mr. Bagaria observed that attention needs to shift from restructuring to recovery, and from domestic recovery to overseas recovery, where the process is much more streamlined compared to the NCLT, which has a meagre 24% success rate for recovery enforcement. It is widely known that companies siphon the money to their overseas subsidiaries, or the shell companies in off-shore jurisdictions. The assets of the companies as well as the promoters lies in other jurisdictions, and thus lenders find them difficult to trace. In this background, Mr. Bagaria requested Mr. Flinterman to explain how banks can employ the expertise of litigation funders, like Omni Bridgeway, to expedite recovery.
     
24. Mr. Flinterman first explained that litigation finance works like a risk-management tool where funding is given on a non-recourse, success-fee basis. The prospect of funding depends on the ‘merits opinion’ which would discuss in detail several factual and legal factors that assist funders in determining the success percentage and quantum of recovery. On review and acceptance by an investment committee, the funders then, depending upon the stage of dispute, formulate strategies for recovery by finding the jurisdiction where assets lie and monetising them through the most suitable and favourable jurisdiction. He gave a recent example where Omni Bridgeway helped the creditor of a construction company with rose fields in Africa gain leverage by acquiring control of the fields. Other examples of assets that are usually frozen are ships, airplanes, apartments, bank accounts and trade receivables.
     
25. Mr. Bagaria further enquired if litigation finance can resolve the problem of debtor’s debt, where the creditor has not received payment because the debtor in turn has not received payment from its debtor. One of the ways, Mr. Flinterman suggested, is by selling the claim itself that helps the lenders in quick monetisation. Further, the balance sheets of the debtors are carefully scrutinised and assets are traced constantly that provides a “movie” rather than a “snapshot” of asset movements. When dealing with sovereign entities, Mr. Flinterman advised to have an immunity waiver clause in the contract.
     

26. The panel consisted of -

     (i)    Mr. Kunal Agarwal – Principal, I Squared Capital
    (ii)   Ms. Pratibha Jain – General Counsel, Everstone Capital
    (iii)  Mr. Montek Mayal – Senior Managing Director, FTI Consulting
    (iv)  Mr. Sivaramakrishnan V – Vice President, Global Infrastructure Partners

27. Mr. Bagaria initiated the third discussion by enlisting huge investments in infrastructure, such as investment of $1 billion by Reliance Digital Fibre Infrastructure Trust, that provided momentum to overall private equity (PE) investments in India. Annual PE investment is expected to surpass $65 billion in 2025. 2020 and 2021 witnessed a relative decline in these investments on account of underperformance of the infrastructure sector due to the crisis in NBFC sectors, financial challenges faced by infrastructure companies and the inadequately developed Indian market for infrastructure financing. Despite macroeconomic headwinds on account of the pandemic, the infrastructure sector continues to present attractive opportunities and robust demand with strong governmental support, like setting up of the National Investment and Infrastructure Fund (NIIF) and the National Bank for Financing Infrastructure and Development (NBFID).
     
28. However, not all has been rosy for the PE journey in India, especially in the exit phase. While 86 PEs invested around $2.9 billion in highways by 2015, there were only 8 exits worth near $25 million. Now, the PE funds are experimenting with a new strategy for exit – sell or merge with a special purpose acquisition company (SPAC), also knows as a blank check company. Such companies are shell corporations listed on a stock exchange with the purpose of acquiring a private company, thereby making it public without going through the traditional initial public offering process.
     
29. When asked about the current stance of PE investors on Indian infrastructure, Mr. Sivaramakrishnan commented that India’s economy is recovering fast from the pandemic with telecom and data exploration sectors leading the industry. Mr. Agarwal observed that policy makers have created a favourable environment in terms of PE inflow. With a change in consumers, the pattern of PE investments has gone bullish. Ms. Jain noted that while PE investments were a distant dream almost a decade ago, today, they have revamped the infrastructure industry in the country.
     
30. Regarding the new solution, Ms. Jain mentioned that the days of depending on promoters for effective results are gone and now the investors have changed their role and taken the driver’s seat by demanding more upfront equity. She observed that big players from the global PE industry have entered the Indian market and they are either doing bilateral control deals or creating specialised platforms to acquire assets.
     
31. She remarked that problems still exist at the policy front especially in relation to contracts with the government. Land acquisitions, regulatory clearances and the age-old issue of government reneging on the contractual commitments, or cancelling tenders still persists. In light of this, Mr. Bagaria suggested that there is an urgent need to bring some discipline to the actions of the government. Various foreign investors have used investment treaties or diplomatic routes to get due enforcement of government contracts.
     
32. When asked about PE investment into new and upcoming sectors, the panellists named fibre network, 5-G towers, renewables, such as solar energy and electronic vehicles, digital infrastructure, and data centre infrastructure. Data centre infrastructure refers to the core physical or hardware-based resources and components – including all IT infrastructure devices, equipment and technologies – that comprise a data centre. It is modelled and identified in a design plan that includes a complete listing of necessary infrastructure components used to create a data centre. Panellists also opined that there has been a visible shift in projects reducing their carbon footprint and investments in green projects. To this, Mr. Bagaria observed that crypto is the new currency, data is the new oil and the infrastructure industry will soon become digital.
     
33. On the topic of COVID-19, the panellists shared a similar view that COVID-19 has reminded the investors of the importance of diversified portfolio management. Although some sectors have been impacted severally, some sectors have benefitted from COVID-19, such as digital sector, freight transportation, telecom and renewables.
     
34. Mr. Mayal explained that three things make the infrastructure industry unique and different from other investing sectors. First, the economies of the sector lend itself to higher risks and challenges. There are substantial upfront costs involved, whereas the profits or returns are made over the lifetime of the asset. This creates a mismatch in terms of inflow (revenues and profits) and outflow (capital expenditure), which in turn creates tensions in the mind of various stakeholders involved. Second, as the sector is vital and critical for any economy, it generates a monopoly, sometimes leading to subpar results or unhealthy competition. Lastly, the sector is highly regulated. Regulatory, political and country risks are higher than any other sector. The combination of these three causes various challenges for the PE investors.
     
35. These issues can be labelled under two-heading. First, issues arising during the life cycle of the underlying asset and second, issues and disputes that relates to funders. Further, the first label can be further categorised as development stage disputes and operational stage disputes. Mr. Mayal then noted that most assets are still operating under competitive biddings. The aggressive assessment in the competitive biddings is due to poor assessment of project cost or timelines and overestimation of demand. Whereas, while considering the risk factor, low probability risks are usually left out from valuation. Thus, this bidding process exposes the funds to higher risk and lead to incomplete, delayed or substantially overrun projects. 
     
36. Mr. Mayal observed that to avoid such challenges investors need to reflect new reality and changes in the sector such as discontinuing the use of the boilerplate agreements from a decade ago. On the debt aspect, enough breathing space needs to be provided. Usually, debt repayment or bond schedule is not consistent with the underlying cash flow of the company.
     
37. Disputes in the sector varies on the stage of investment. Entry level disputes are usually breach of warranties, breach of investment schedules, misrepresentations and indemnity claim. Whereas, the exit level disputes primarily consist of pricing disputes. The promoter quotes a lower price and the funder seek higher valuation. A third category, that are disputes between entry and exit stage are related party disputes, arms-length transaction dispute, breach of investment size and debt covenants.
     
38. PE investors have also put in frequent use the ‘bad bank’ model – wherein a bank is set up to buy bad loans and other illiquid holdings of other financial institutions, similar to SPVs created by banks. In the background of dealing with disputes, the panellists also remarked on the developing synergy between PE investors and litigation funders.

39. The panel consisted of –

     (i) Mr. Rohit Chandak – Chief Financial Officer, Ayana Renewable
    (ii) Mr. Vinay Sekar – Senior Vice President, Strategy, Cube Highways and Transportation
          Assets Advisors Pvt Ltd
   (iii) Mr. Roger Millburn – Investment Manager and arbitration specialist, LCM Singapore
   (iv) Mr. Montek Mayal – Damages and valuation expert; Senior Managing Director & India
          Practice Leader, Economic Consulting, FTI Consulting

40. The panel discussion commenced with Mr. Bagaria providing a brief overview of the previous discussions and how lenders, PE investors and strategic fund managers, all share the same view in terms of the growing opportunities in the Indian market, failure of the IBC to be an effective dispute resolution mechanism, and other regulatory challenges. Despite the unprecedented circumstances, infrastructure activities received 13% share of FDI equity inflow, while cross-border M&A surged by 83% to $27 billion. Asset owners and infrastructure experts are reportedly applauding India’s initiatives that will provide new forms of long-term financing not currently available in India’s financial market.
     
41. Commenting upon the methods to bring additional investment in the infrastructure industry, Mr. Chandak opined that the government as well as the investors needs to think from a long-term perspective and stop making long-term statistical assumptions based on short-term market trends. International investors, who are key players in bringing long-term investments, are wary of coming to India because of the failure of the government to provide appropriate contract security. Mr. Chandak echoed the concerns of the panellists in other discussion – delays in land acquisition, regulatory issues and sluggish judiciary system.
     
42. Mr. Sekar pointed out that development and counter-party risk in the country is still running high. Therefore, the focus of the investors has shifted to operating assets and they have started creating specialised platforms of their own which have been successful in India. It has aggregated assets that are capable of underwriting risks which in turn allow the platforms to take up higher construction risks. Investors have also started creating asset monetisation companies that provides for quick growth opportunity of operation assets. Asset monetisation involves the creation of new sources of revenue by unlocking the value of unutilised or underutilised assets.
     
43. Mr. Bagaria observed that the platforms being created by the investors are run by professional who can understand and run the assets. There is a direct interaction of such platforms with the government which might lead a change in government’s behaviour. Mr. Sekar then noted that funders know that the infrastructure is for the people and thus, the investors through platforms have started interacting more with the people directly benefitting from the projects, helping them manage the assets better.
     
44. The discussion then turned towards how funders can minimise their risk and safeguard their investments. Mr. Mayal noted that the ultimate goal is to have a mechanism in place to allocate risk. In infrastructure, being exposed to governmental arbitrary actions is inevitable. Risk cannot be eliminated; however, it can be reduced. Contracts and investment treaties are one way of allocating these risks between various stakeholders and the government. Investment treaties are bilateral and multilateral in nature and protect investors. In case of a breach, it allows the investor to seek redress and bring claims against the sovereign for specific performance or damages. These treaties offer (i) protection against direct or indirect expropriation, (ii) fair and equitable treatment, preventing that state from taking any arbitrary, unfair or discriminatory measure, (iii) national treatment, under which the host state provides equivalent treatment to international investments as domestic investments. To this, Mr. Bagaria added that the investment regime has offset the reign of ‘gunboat diplomacy’, under which foreign policies are supported by use or threat of military force. 
     
45. The panellists noted that there is a visible change in the nature of discussion over the decade. The discussions have gone from lenders and creditors’ expectations from the government and policy changes, to solutions and implementation of the projects.
     
46. Mr. Milburn spoke about the existing relation between long-term investors and their use of litigation finance. He noted that, unlike earlier days when investors only used to engage with litigation funders when something goes wrong, the industry is seeing acceptance at all stages including selling of claims. This has sparked the interest of litigation funders in the Indian sector which is set to become the world’s third-largest construction market by 2022.
     
47. Mr. Bagaria concluded the discussion by noting that litigation funders are using creative solutions, such as giving bank guarantees against securities already deposited in courts for the appeal against an arbitration award, thereby allowing these funders to make capital gains without large disbursement of monies. 

     III Conclusion

48. The conference provided a nuanced and comprehensive understanding of the expectation that key players in the industry have from the government and their outlook towards the Indian infrastructure market. Several interesting and new approaches towards long standing problems of the industry were proposed. From the event, it can be concluded that the infrastructure sector has huge growth and investment potential in the coming years. At the same time, a lot depends upon how the government responds to roadblocks. In all, the conference served as a useful primer to get both the bird’s eye view and the worm’s eye view of the infrastructure finance in India.