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On July 1, 2017 a new tax regime, in the works since over 15 years, designed as 'One Nation, One Tax', went live! Its impact on infrastructure will resolve future litigation in this area and although will mean higher tax, will also allow input tax credit in many categories. Contracts which do not have room for renegotiation or those that do not account for contingency factors, would feel the pinch. Credit restrictions are causing a worry and need clarifications. This quarter is likely to be impacted as the country adjusts to GST.
The NPA disease, with over Rs 8 lakh crore of public money stuck in debt defaults, has also received much attention both due to the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC) and the National Company Law Tribunal (NCLT). The RBI which is required to tackle this menace has stepped up the pressure on companies to pay up or face liquidation. Insolvency Professionals are given a time period of 180 days to draw up a rescue plan. Several companies have slipped into the hands of lenders as they wrest control and seek new buyers. This trend will help stem the rot of siphoning funds from companies and keeping them on the deathbed but not letting them die while keeping the creditors at bay. Several companies are selling unprofitable or non-core divisions, subsidiaries, assets to save their financial burden. Jaypee Group, DLF, Essar Steel, Bhushan Steel, Jyoti Structures and many more are on the verge of bankruptcy.
In the quest for momentum in economic activity the road ministry has resulted hybrid annuity model (HAM) road projects in India. Now consider this: Till now, around 43 projects worth Rs 42,000 crore have been awarded under HAM by NHAI. With just 9% equity commitment from the developers, it seems to be a great bet for contractors with reputation and experience. With several of the experienced ones under a debt trap, the order book is overflowing for more recent entrants like Dilip Buildcon, J Kumar, Gayatri, Ashok Buildcon, etc., and 22 HAM projects have reached financial closure.
Moving on to the bond market, in the first half of this year, two companies-IRB InvIT Fund and India Grid Trust with much fanfare launched their infrastructure investment trusts (InvIT) Fund. Although, these bonds were oversubscribed, as we speak now, due to their muted listing on the financial grid, both these funds are trending below their issue price. Reasons attributed include a high ticket size (Rs 10 lacs minimum) and them being closer to debt than equity. Plus, during the current bullish stockmarkets, investors favour equity. Having said that, since investors in InvITs enjoy returns in the form of dividends, interest and buybacks, it would encourage more participation once unit holders receive their maiden dividend payment. But that will require investors to be patient and adopt a wait and watch strategy. Speaking of bonds, the Pune Municipal Bonds tasted success as they were oversubscribed by six times for a water supply project. The smart cities mission has mandated credit rating of cities and nearly 94 of them have got themselves rated. New Delhi Municipal Council is likely to proceed for its bond raising next and half a dozen other cities.
The underlying theme is clearly Swachh Bharat, in economic terms too, as GST, IBC drive more transparency and fair practices. There are benefits for those who have managed to clean up their act. Stock market valuations and order books are surging, while money raising exercises are easier, for clean and ethical organisations.