Asset Monetisation

Major power companies set to launch InvITs

In recent years, infrastructure trusts, or InvITs, have become popular among investors of long-term revenue-generating assets. InvITs enable a large number of investors to pool their money for investments into operational infrastructure assets in return for regular dividends. Two of India’s largest power companies, Tata Power and Power Grid Corporation of India Limited (Powergrid), are now getting ready to launch their InvITs to raise funds in the coming months. Power Line presents an update on their proposed InvITs…

Tata Power

In July 2020, Tata Power’s board gave in-principle approval for setting up an InvIT for the company’s renewables business, with terms and conditions to be discussed with potential investors. More recently, in October 2020, the company filed an application with the Securities and Exchange Board of India (SEBI), seeking in-principle approval for the creation of the InvIT. Anchor investors in the InvIT have started their due diligence of the assets proposed to be transferred to the InvIT, and Tata Power expects to sign the binding documents in the next few months.

The necessary board and shareholder approvals will be sought after the finalisation of the binding agreements. “The creation of the InvIT will provide a suitable structure for the company to expand its renewable business as laid out in its financial year 2025 strategy. The company is progressing towards setting up the InvIT as per the initially laid timelines and is confident of completing this transaction in this financial year,” stated the company in a recent press release.

Tata Power is India’s largest integrated power company. Together with its subsidiaries and jointly controlled entities, it has an installed/managed capacity of 12,742 MW. It has nearly 2.6 GW of renewable energy assets, both solar and wind, accounting for 30 per cent of the company’s portfolio.

According to media reports, in July 2020, the company selected seven investors to enter the due diligence phase. The selected investors will acquire a 49 per cent stake with the remaining 51 per cent to be retained by Tata Power. The total value of the InvIT was pegged at $2 billion-$2.5 billion, with the amount raised by investors expected to be $1 billion-$1.5 billion.

Powergrid

In September 2020, Powergrid received approval from the Cabinet Committee on Economic Affairs, chaired by the prime minister, for the monetisation of assets through the InvIT model.

The approval is expected to help Powergrid monetise its assets with a gross block value of more than Rs 70 billion in the first lot. These assets, which are mainly high voltage transmission lines and substations, are held by the company in the form of special purpose vehicles.

Reportedly, the core group of secretaries on asset monetisation has asked Powergrid to bundle both regulated tariff mechanism and tariff-based competitive bidding (TBCB) assets to enhance the quantum of asset monetisation. As of June 2020, Powergrid’s TBCB portfolio comprised eight operational projects entailing a cost of Rs 123.52 billion. Based on the experience gained, further monetisation will be carried out in the future. The proceeds from the asset monetisation will be deployed by Powergrid in its new and under-construction projects.

This is the first time any PSU in the power sector will undertake asset recycling by monetising its assets through the InvIT model and using the proceeds to fund the new and under-construction capital projects. The capex planned by Powergrid for 2020-21 is Rs 510 billion.

Others

In October 2020, private equity firm KKR became the sponsor of the India Grid Trust (IndiGrid), the infrastructure segment’s first InvIT set up by Sterlite Power, which went public in 2017. KKR currently owns a 23 per cent stake in IndiGrid. As a sponsor, it can infuse more long-term capital into the trust, which aims to have assets under management (AUM) worth Rs 300 billion over the next two years as compared to the Rs 136 billion now. In May 2019, KKR invested Rs 10.84 billion in IndiGrid, while GIC Infra Holdings invested another Rs 9.8 billion.

Outlook

The market for InvITs has seen considerable growth in recent years. The SEBI has made relaxations in the InvIT guidelines in recent months. InvITs can now raise equity capital through the institutional placement route two weeks after the last exercise. Earlier, the mandatory time gap between two institutional placements was six months. Currently, there are five operational InvITs in India with a combined AUM of around Rs 600 billion. According to CRISIL, this asset class can increase manyfold over the next two years, driven by the need of infrastructure developers to monetise their mature assets and the strong appetite of global investors to invest in India’s infrastructure growth story. It will be interesting to see the response of investors to the upcoming InvITs in helping the sector reduce its debt and benefit from this investment opportunity.

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