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FDI in Infrastructure in India

Nov 17, 2017 11:49 AM 3 min read

The balance sheet constraints of Indian real estate companies with ongoing regulatory changes have created opportunities for patient foreign capital. A comprehensive regulation around FDI in infrastructure in India would be a step in the right direction. Here is a summary of the core themes:


Capital Structure Design


  • Capital structure decisions in terms of how much debt and equity should be issued, will be a key consideration for the sector in India going forward
  • Another compelling question would be what kind of equity suits best. Regulations such as RERA Act [Real Estate (Regulation and Development) Act, 2016] will make it imperative that there is a demarcation between equity that gives one ownership vs. equity that gives one control of a company
  • Important to have a clear separation between short term working capital financing and long term structural debt required by businesses
  • Within long term debt required by the real estate sector, there will be a lot of debate in terms of decisions regarding floating versus fixed rates, interest servicing schedule, convertibility and payment in kind type structures etc.
  • Strategies would have to be deployed whereby the ownership of the property can be separated from the operation of the property. An operating company vs. property company structure that has been utilized successfully in the West. Essentially structure of the business will be key going forward with traditional real estate business models challenged in India


Market Dislocations


  • There are two focal points of interest. Attractive assets with impaired capital structures and average assets at extremely attractive valuations
  • Attractive real estate assets can be acquired in today’s market given that impaired capital structures reflect poorly on the company owning the assets and not on the quality of the asset itself
  • Ability to use Debt for Equity swaps or outright buyouts has the potential to provide capital providers with some very attractive risk adjusted returns
  • Given the fragmented nature of the real estate development market in India, aggregation is the way forward. What this also implies is that assets can be acquired at a significant discount to replacement cost in many cases
  • Patient capital with the ability to aggregate can access extremely attractive risk adjusted returns in the country


Increased Consumption Demand


  • Increased Consumption demand from the middle class with rising incomes will fuel a demand for housing, lodging and entertainment
  • There are various players involved. However in a 2 trillion USD economy a lot more needs to be done
  • Working with local partners to access opportunities in the lodging industry can be interesting
  • Creating a property holding company with a focus on consumer focused real estate along with a separate operating company with a local partner can be an interesting play
  • Aggregation of the lodging business is an investment opportunity for patient capital


Investing Structures Worth Exploring


  • Foreign Portfolio Investor (FPI): A SEBI registered FPI is one route that can be preferable for direct equity investments
  • Alternative Investment Fund (AIF): A SEBI registered AIF has the capacity to invest across the capital structure of companies. This structure lends flexibility to the investor to pursue a broad mandate
  • Non Banking Financial Company (NBFC): A NBFC structure works well for those specifically interested in creating loan books. Given the recent regulatory changes allowing for 100% foreign investment for all regulated financial activity in India, foreign institutional investors can either buy out a NBFC outright and create a lending book or can invest into an existing NBFC


Originally Published on Medium