Highway project developers said a more direct exit route than what has been recently approved by the Cabinet is required to bring in more liquidity in the sector.
After going through the fine print of the Cabinet decision, the highway developers have now written to the Prime Minister citing issues with the mechanism approved by the Government for bringing in new investments in the sector. They also said that it will increase transaction costs and reduce returns for all stakeholders.
Objecting to the manner in which the exit of an existing developer and stepping in of new investor has been permitted, highway developers have now said that they doubt whether the 10-year income tax benefits for infrastructure projects can be transferred to the new buyer.
They also said that the Government should not levy any penalty for those projects which have been completed and are under operation.
The Government had said a penalty of up to one per cent of the project cost could be levied for projects where promoters exit.
In June, the Cabinet Committee on Economic Affairs (CCEA) approved a proposal that effectively permitted new investors with deeper pockets to buyout the rights to develop and operate highway development projects from developers, who had originally bagged the rights.
But, the Cabinet has permitted such exit of developers through a circuitous route, called “substitution of concessionaire”, which is driven by the lenders and requires formation of a new special purpose vehicle (SPV) to manage the project.
PROBLEMS
Replacing the existing SPV with a new one will create complications and increase the risk profile of the project. This will require changing the road construction and other related contracts to the new SPV and thus attract new stamp duty and other costs. “There will be constraints in the transfer of tax benefits, losses and depreciation benefits to the new SPV,” said project developers.
The Government must facilitate buying and selling of shares within the same SPV, which was formed to own and operate the project, developers have said. This has been a long standing demand of highway developers, and was supported by National Highways Authority of India as well as Highways Ministry.
“The current circular has failed to address the issue of unlocking of equity in healthy, operational projects that will release about Rs 6,000 crore of equity in older concessions,” said National Highway Builders Federation, in a letter to the Prime Minister sent four days ago.
Usually, highway development and operation rights are given to a developer for long tenures, ranging from 15-30 years. The exit rules for the original developer vary depending on when the projects were awarded. For projects awarded before 2009, original developers are required to keep 26 per cent stake through the entire project life.
Incidentally, it is these projects that are likely to attract maximum investor interest as they have a history of toll collection.