The government has decided to allow private equity firms to jointly bid with developers for
infrastructure projects like roads and highways. At present, these entities can only participate indirectly in these projects by committing funds to one of the bidders as they are not allowed to bid directly.
If the bidder with whom the PE firms may have back-to-back agreement turns out to be successful, they can later pick up a stake in the firm.
The development is significant because it is likely to evoke interest among PE firms, which are currently slowing down their investment in infrastructure projects in the country because of slow environmental clearances and regulatory uncertainties with regard to raw material linkages.
“Given that financing of the infrastructure sector is essential to sustain growth, the move to enable PE/VC (venture capital) funds to invest in these projects is in the right direction,” said a government official involved in the decision-making process.
The proposal was mooted by the infrastructure finance committee headed by HDFC chairman Deepak Parekh. Now the finance ministry is understood to have approved the proposal and sent it to various ministries for vetting.
“The government’s move is a major attempt to attract PE funds into capital-intensive infrastructure projects. If PE funds become part of a consortium, they could offer great deal of capital to their bidding partner at the inception stage itself. However, when we look at fresh infrastructure capital raised in the stock market this year (around $3-4-billion) and add to that new infrastructure raised by PE funds this year (around $1-billion), we reach a figure of $4-5-billion, well short of the $10-billion private sector equity capital requirement,” said a country head of a PE firm.
Given that the government has said that the country needs $150-billion of private sector capital to finance the country’s infrastructure growth over the next five years, the annual requirement is $30-billion. Applying a standard 70:30 debt to equity ratio means that around $10-billion of private sector equity capital is required for investment in Indian infrastructure every year.
According to Venture Intelligence, a research firm, private equity investment in India totalled $6.57-billion in 2010, which is more than double the $2.5-billion invested last year.