Nantoo Banerjee
For ordinary investors, it proved to be a slow-killer, the much-hyped infrastructure mutual funds. This was at the beginning of the 11th Plan, or around 2007 when the economy was growing at close to nine per cent and the government projected a very glorious picture of India’s infrastructure sector. Entered mutual fund operators, domestic and foreign, with an array of infrastructure funds to tap the common man’s pocket, exploiting the bullish market sentiment and rising stock indices. In five years’ time or by the end of 2012, most of these infrastructure mutual funds have reached almost a junk status. Investors lost thousands of crores of rupees. It is an unreported market scam of extra-ordinary proportions. And, now, here comes Rs. 60,000-crore public sector infrastructure bonds, in the first year of the 12th plan. Does anyone know much about the status of then unfinished 12th plan infrastructure projects?
No one seems to be concerned about the plight of ordinary investors. In fact, the government is indirectly responsible for losses suffered by investors who went by the hype and hoopla created by the country’s top economy managers about the glorious future of India’s infrastructure sector projected in the 11th plan document. One may say it was a government-propped market scam as one after another infrastructure projects failed to meet their performance projections. The market came crushing down as infrastructure majors struggled to deal with work slowdown, high cost of funds and shrinking bottom lines.
Almost every infrastructure project and core sector projects linked with those basic industrial infrastructure activities languished. Ports, airports, telecom, highways, power generation, transmission, oil and natural gas production, housing and urban development and a host of other related sectors all underperformed. Naturally, the market and the infrastructure funds too fared badly although the fund operators hardly suffered as they collected the guaranteed management fees. Only the investors lost.
Even hi-profile infrastructure funds operated by such enterprises as UTI, State Bank of India (SBI) and American International Group (AIG) have badly let down their investors. For a specific example, an investment of Rs. 40,000 in UTI Infrastructure Fund – Series I – Growth Plan on January 23rd, 2008 was worth only Rs. 34,120 as of January 14th 2011. Because of its poor performance, UTI switched the Series I portfolio to another fund, called UTI-Infrastructure Fund-Growth Plan, on January 14, 2011. In less than two years, the switched portfolio of Rs. 34,120 was worth Rs. 28,864 as on November 16th, 2012.
Thus, in nearly five years’ time, the original amount invested in the UTI infrastructure fund-Series I itself shrunk by close to 30 per cent. Similarly depressing are the performance of SBI and AIG. The AIG Global Corporation sold its mutual fund business itself to a Japanese entity, PineBridge Investments, with all its holdings — lock, stock and barrel. Names of all old AIG schemes in India, including AIG Infra & Eco Reform Fund, now carry PineBridge prefix instead of AIG. Investors were advised that they could exit by a certain date without an exit load charge. The date has long expired.
Yet, the government and the industry are unfazed. The current year’s national budget provide for tax-free corporate infrastructure bonds collectively up to Rs. 60,000 crore. Ten firms have already been identified and given approval by the government to raise infrastructure bonds for a total amount of Rs. 53,500 crore during the rest of the financial year, which effectively means the period between now and March, 2013, period. They all have geared up to tap the long and mid-term bond market.
These firms are: National Highways Authority of India (NHAI) for Rs. 100 billion; Indian Railway Finance Corporation Limited (IRFC) Rs. 100 billion; India Infrastructure Finance Company Limited (IIFC) Rs. 100 billion; Housing and Urban Development Corporation Limited (HUDCO) Rs. 50 billion; National Housing Bank (NHB) Rs. 50 billion; Power Finance Corporation (PFC) Rs. 50 billion; Rural Electrification Corporation (REC) Rs. 50 billion; Jawaharlal Nehru Port Trust (JNPT) Rs. 20 billion; Dredging Corporation of India Limited (DGCIL) Rs. 5 billion; and Ennore Port Limited Rs. 10 billion.
Although investment in public sector tax-free bonds, which hold a kind of sovereign guarantee, are safe, the same can’t be said about the corporate beneficiaries of these bonds or on-field executors of projects. Almost all the sectors associated with the funding through these bonds failed to meet their 11th Plan targets. Subsequent capital issues by companies and mutual funds may once again fail to deliver to investors. This remains a genuine fear. And, the government has to do something very fast to remove the hindrances to infrastructure projects and not waste time on lengthy political debates on development imperatives.
The ground reality has not changed much in the last five years. In fact in many areas, it seems to have worsened. In telecom, the government has been forced to go for fresh 2G spectrum allocation delaying the telecom projects and adding extra burden on the finances of telecom companies, a majority of which are making losses out of their existing operations. New seaport, airport, railway and highway projects are well behind their respective schedules not because of the shortage of funds, but due to land acquisition and environment clearance problems. Indian Railways’ politically-designed management style and revenue model have been matters of serious concern for several years with regard to its future viability. Power projects have long been suffering from land acquisition, environment clearance and raw material availability constraints.
While the alleged choking of gas supply from the KG basin (block D) by Reliance Industries (RIL) to extract higher price realization has led to huge loss of production in downstream projects, running into a few thousand crores, and delayed new projects, the recent coal block de-allocation to dozens of private companies have made the future of the power sector quite uncertain. The success of the 12th plan power generation and transmission projections hinges on the readiness of these coal blocks to feed linked power projects. Housing and urban development projects have both land issues and interest rate concerns for retail and wholesale (bulk) loans to developers and buyers of properties.
Although tax-free infrastructure bonds may look sound by rating agencies taking a tunnel vision of the promoters’ public sector backing, they hardly guarantee productive utilization of these funds, leave alone yielding good returns for fund applicators from their respective areas of activity. Under the present political situation and economic environment, the direct and indirect risk elements attached to these bonds can’t be wished away. (IPA)
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