The steady increase in FDI inflow, except in the year of Covid’s first wave, is driven by growing commitments to meet clean energy targets under the Paris agreement and an increasing pool of Impact Investors, who are keen on aligning their investment goals to UN Sustainable Development Goals by 2030. However, India is yet to attract a larger flow of foreign capital to clean energy as the domestic flow still dominates about 80% of the overall finance flows.
Lt Col Monish Ahuja, Chairman & MD of Mumbai-based Punjab Renewable Energy Systems, a provider of bioenergy and biomass solutions, expects India to become a sweet spot for global investments in the RE space. However, he believes, achieving the 2030 RE targets could be a tough ask as the investment hurdle rates required are very high unless concerted efforts are made to create a more friendly investment environment in order to access the vast pool of global capital towards sustainable ESG compliant RE businesses, including Biomass-Bioenergy, Green Hydrogen, et al.
Ahuja further added, “smaller players need to tie up and align themselves with the strategies of larger global players interested to invest in India. This will enable them to be backed by corporate guarantees / structured finance of the large balance sheet from these larger global players. Secondly, smaller players have to collaborate and come together under government programs where they can increase their bargaining power on a collective basis. Industry bodies like the Confederation of Biomass Energy Industry of India and CLEAN, a non-profit organization committed to supporting, unifying, and growing clean energy enterprises, are diligently working towards making capital accessible to the stakeholders.”
Role of Alternative Investment Funds (AIFs)
As per a study by the International Finance Corporation, India would need US$450bn in financing to meet its clean energy targets by 2030. Assuming a debt-equity split of 70-30, this means ~US$315bn has to come from the debt market. Accumulating financing of such an enormous size could be a daunting task unless new investor classes are tapped in and capital in existing projects is recycled.
However, small and medium RE project developers do not get the right access to the bond market due to the skewness of the market appetite towards G-sec and higher-rated corporate bond issuers, as discussed in the section ‘Asymmetry in debt financing’ in Part I. This creates a barrier to clean energy financing, particularly in the short to medium term. In such a scenario, AIFs fit in, not only because it provides short-medium term access to the capital market, but also due to the fact that they can
- Invest in start-ups or unlisted securities and adopt complex trading/leveraging strategies unlike other investment vehicles like mutual funds.
- Help crowding in many institutional investors for a single project due to diversification limits set by SEBI (Cat I and Cat II AIFs are not permitted to invest more than 25% of their funds in a single investee firm while, for Cat III, the limit is 10%).
- Enhance the credit rating of bond issuance by using structured finance, where the AIF sponsor could provide a partial credit guarantee using a subordination/waterfall structure and customized periodic cashflows.
- Enable private credit towards financing segments of the market such as Commercial & Industrial RE, hybrid technologies, EV network financing, etc where banks aren’t highly active yet.
- Finance standalone mid-sized projects without relying on sponsor support.
This way AIFs can enable RE developers to reduce their cost of capital and help them repay loans taken from banks/NBFCs using the proceeds from bond issuances. On the other hand, investors are assured of coupon payments as they are backed by cash flows from stable and operational projects.
The emergence of more and more AIFs in the clean energy space would increase the confidence of investors in the sector by helping them undertake calculated risks, invest for impact, and giving exposure to complex and new clean energy tech. On the other hand, it will help RE entities, which are so far reliant on few lenders like IREDA, REC and PSU banks, achieve diversification in the borrowing mix.
The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.