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Narendra Modi’s $5 trillion GDP goal hits a hurdle: Debt at road builder

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India’s path to economic recovery faces another obstacle, with Prime Minister Narendra Modi asking the state road builder to stop constructing highways after its debt ballooned almost seven-fold over the past five years.

“National Highways Authority of India totally logjammed with unplanned and excessive expansion of roads,” the prime minister’s office wrote to NHAI in a letter dated Aug. 17. “NHAI mandated to pay several times the land cost; its construction costs also shooting up. Road infrastructure has become financially unviable.”

Modi’s office proposed that NHAI be transformed into a road-asset management company, according to the letter obtained by Bloomberg, and the prime minister’s office asked NHAI to reply within a week.

The decision is a reversal from Modi’s first term, when his administration was praised for its breakneck speed of highway construction that helped make India one of the fastest-growing economies in the world. However this came with the burden of escalating costs, leaving NHAI increasingly dependent on the government for financial support at a time when Modi is looking to contain his budget deficit.

Restricting road-building risks imperiling Modi’s target to make India a $5 trillion economy as roads are necessary for socio-economic development, said Vikash Kumar Sharda, a partner at Infranomics Consulting LLP, who previously consulted for PWC India. “Road is critical infrastructure, and putting breaks on it will not only result in a slowdown of highway construction but also of other sectors that are dependent on it.”

There’s a strong co-relation between economic growth and investments in infrastructure, with roads accounting for about 3.1% of gross value added, Modi’s economic advisers said in a report this year. Data due Friday will probably show India’s gross domestic product expanded 5.7% in the quarter through June, the slowest pace in five years.

Modi’s office now wants NHAI to revert to a model used by his predecessor, where NHAI would auction projects to developers. They’d construct the roads, collect toll from users and then would transfer ownership back to NHAI after an agreed period. Weak private sector participation pushed Modi to scrap this practice and he permitted NHAI to bear as much as 100% of the costs in certain road projects that led to ballooning debt.

NHAI’s outstanding debt of 1.8 trillion rupees would entail annual interest servicing of about 140 billion rupees, higher than the 100 billion rupees NHAI collects as toll, according to analysts at SBICap Securities Ltd.

Land acquisition costs have also risen to more than 25 million rupees per hectare from 9 million rupees after fair-price laws were introduced in 2013, and this alone accounts for more than 30% of NHAI’s expenses, according to ICRA Ratings Ltd.

The prime minister’s office didn’t reply to an email seeking comment and NHAI declined to comment. The letter contains only suggestions and top-rated NHAI is fully capable of raising enough debt to keep building roads, Nitin Gadkari, Modi’s minister for roads, was cited by the Mint newspaper as saying on Tuesday.

Ratings company ICRA on Wednesday said the build up of debt means NHAI must either go slow on new projects — a choice Modi can’t afford as he needs to spur economic growth — or shift to a build-operate-transfer model involving equity-purchases by private players. Many developers can’t support huge equity investments that are part of BOT projects, the rating company said.

Among the beneficiaries of this shift could be IRB Infrastructure Developers Ltd., which has traditionally focused on BOT projects where the operator collects a toll from road users.

“The decision to switch back to BOT-toll is much needed given the fiscal constraints,” IRB Infrastructure Chairman Virendra Mhaiskar said. “In the present dispensation, given the land acquisition cost, restricting to BOT only for a year or two may be a wise idea.”

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Inflation concerns resurface in India as oil drags assets lower

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India’s rupee halted a seven-day rally and bonds declined after a drone attack on Saudi Arabia’s oil facilities sent global crude prices soaring by the most on record.

The currency fell 0.8% to 71.48 per dollar and the benchmark 2029 bond yields rose six basis points to 6.70%. The S&P BSE Sensex gauge of equities declined 0.7%.

India buys more than two-thirds of its oil, mostly from the Middle East, making it one of the most vulnerable in the region to a surge in oil prices. The spike come even as benign inflation and a slowing economy has led traders to bet the central bank will add to four rate cuts this year at its meeting in October.

“If crude prices stay up, the Reserve Bank of India may not be able to deliver more than 25 basis points of cuts,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai.

The increased geopolitical risk concerns overshadowed the measures Finance Minister Nirmala Sitharaman announced over the weekend to revive economic growth from a six-year low. The government’s third set of steps in four week include a tax refund program for exporters and a funding window for affordable housing to revive stalled projects.

Brent soared 10% and crude traded in New York added 9% after the world’s largest oil exporter lost about 5.7 million barrels a day of output following the attack. It is the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbor.

Fund Flows

The shock comes when sentiment remains fragile in India’s $1.9 trillion stock market. While equities appear to have found a floor after suffering the worst three-month period since 2016, as foreigners turned net buyers last week, a series of steps by authorities to revive the economy have failed to spur a sustainable rally.

Global funds have pulled $4.5 billion from shares in the current quarter, and a weak rupee typically leads to a vicious cycle of capital outflows.

“Current-account deficit economies, which are oil importers, will fare worst,” said Khoon Goh, the Singapore-based head of Asia research at Australia & New Zealand Banking Group. “In this regard, INR, IDR and PHP are likely to underperform. USD/INR, after having fallen below 71 last week, is likely to test 72 again if oil prices stay elevated.”

–With assistance from Kartik Goyal.

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India’s growth ‘much weaker’ than expected, still much ahead of China: IMF

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India’s economic growth is “much weaker” than expected, the IMF said on Thursday, attributing the reasons to corporate and environmental regulatory uncertainty and lingering weaknesses in some non-bank financial companies. The International Monetary Fund (IMF) in July projected a slower growth rate for India in 2019 and 2020, a downward revision of 0.3 per cent for both the years, saying its GDP will now grow respectively at the rate of 7 and 7.2 per cent reflecting a weaker-than expected outlook for domestic demand.

However, India will still be the fastest growing major economy of the world and much ahead of China, the Washington-based global financial institution had said.

“We will have a fresh set of numbers coming up but the recent economic growth in India is much weaker than expected, mainly due to corporate and environmental regulatory uncertainty and lingering weakness in some non-bank financial companies,” IMF spokesman Gerry Rice told reporters at a news conference here on Thursday.

The risks to the outlook are tilted to the downside, he added. Responding to a question on the recent GDP figures of India, Rice said the IMF will monitor the economic situation in India. “We will update that assessment in the upcoming world economic outlook,” he said.

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With stake sales, Yes Bank is now poised for a makeover

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Yes Bank’s shareholding structure may witness a major churn by the year-end as founder Rana Kapoor has initiated talks to sell a part of his holding to One97 Communications Ltd, the parent of Paytm and Paytm Payments Bank.

Independently, a Reuters story on Tuesday cited Yes Bank CEO Ravneet Gill as saying that the bank is close to selling a minority stake to a global tech company as part of its capital-raising exercise. Although the bank subsequently denied these reports, Mint has independently verified that such talks might have indeed progressed somewhat.

The tech firm’s association is expected to help further the bank’s digital ambitions.

The bank has already been talking to large private equity firms for capital infusion. On 30 August, Yes Bank’s board proposed to increase the bank’s authorized share capital from Rs 800 crore to Rs 1,100 crore to enable an expansion in the paid-up capital.

If Rana Kapoor does manage to sell his stake to One97 Communications, or any other shareholder, it will not make any difference to the bank’s capital structure. Fresh equity issuance, on the other hand, will lead to dilution in promoter shareholding.

According to senior executives at Yes Bank, the promoters are willing to reduce their shareholding following this stake sale and also amend the articles of association, letting new shareholders get a board seat.

“We are open to reducing stake if the bank decides to sell a minority stake to a global tech firm,” Shagun Gogia told Mint. Gogia is co-promoter Madhu Kapur’s daughter and an additional director on the Yes Bank board. Madhu Kapur and her offices hold 9.17% stake in the bank, as of 30 June.

Rana Kapoor and his family offices hold 10.6% stake in the bank. A person close to Yes Bank’s co-promoter Rana Kapoor’s family said the stake sale to One97 would be completed through the stake held by Kapoor and his promoter group entity Morgan Credits Pvt. Ltd (MCPL); the combined holding of these two entities in Yes Bank is around 7.34%.

“There have been discussions between Kapoor, Yes Bank and several fintech firms including One97 Communications Ltd since August,” said the person cited earlier.

A statement issued by the bank to stock exchanges said: “The Bank in its usual and ordinary course of business continues to explore various means of raising capital/funds through issuance of securities to diverse set of investors, in order to meet its business/regulatory requirements, subject to compliance with prescribed procedures and receipt of statutes/regulatory approvals.”

Hindustantimes

A One97 Communications spokesperson declined to comment on the story. Kapoor also declined to comment on this story. An email sent to Yes Bank also did not elicit a response.

If true, the deal will require RBI’s approval, given that One97 holds the licence for a payments bank. Questions are bound to be raised over whether the licence holder of a payments bank should be allowed to acquire a stake in a universal bank as it might be seen as a workaround. In addition, the widening of One97 Communication’s losses, as reported in Mint on Tuesday, is bound to weigh on the approval process.

Kapoor and MCPL also need to obtain consent from Reliance Nippon Life Asset Management Ltd (RNAM) to sell their stake, given that around 7.34% is pledged with RNAM. When contacted, an RNAM spokesperson said, “Reliance Nippon Life Asset Management has not given any consent and is not in discussion with anyone about Yes Bank’s pledged shares.”

Yes Bank co-promoter Rana Kapoor and his family-owned firm MCPL had to pledge their entire 7.34% or 170.25 million shares with RNAM. This was done because RNAM wanted to convert a previously unsecured loan (given to MCPL through non-convertible debentures) into a secured loan as the bank’s stock has lost 80% over the past year.

Last year, MCPL raised Rs 1,160 crore by selling non-convertible debentures to RNAM. A prepayment of ₹200 crore was made by MCPL to Reliance MF in November. The loan pact mandates that the value of Yes Bank shares (held by Kapoor and MCPL) should always be greater than double the loan outstanding.

The value of these 170.25 million shares as on Tuesday is around Rs 1,182.13 crore.

Yes Bank is in desperate need of fresh capital to improve its common equity tier-1 (CET-1) ratio adequately above the statutory requirement of 7.375% to stay afloat. The bank’s CET-1 ratio is marginally above this at around 8.6% after it completed its Rs 1,930 crore stock sale to institutional investors last month.

On 16 August, Mint reported that the bank is looking to raise an additional $600 million after raising $270 million from large investors through a qualified institutional placement.

The Yes Bank stock has been falling steadily since RBI indicated in August 2018 that Kapoor’s term as the bank’s CEO would not be renewed after January 2019. Since 20 August last year, Yes Bank shares have lost over 80% to Rs 63.10 as of Monday on the BSE.

Both MCPL and Yes Capital (India) Pvt. Ltd (which holds 3.26% in the bank) are fully owned by Kapoor’s three daughters.

In September 2018, after Yes Bank co-promoter Madhu Kapur sold a part of her holding, Rana Kapoor had tweeted how he regarded his shares as “diamonds”.

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