Investing in Indian infrastructure: opportunities and risks
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Investing in Indian infrastructure: opportunities and risks

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India has done much to reform the investment process for infrastructure development and it is planning for ambitious growth. Amit Kapur of J Sagar Associates investigates how foreign investors should ready themselves

India has done much to reform the investment process for infrastructure development and it is planning for ambitious growth. Amit Kapur of J Sagar Associates investigates how foreign investors should ready themselves.


Over the last decade, India has built some world class infrastructure facilities such as the Delhi and Mumbai airports. Indian projects often suffer crippling time and cost overruns due to delays in the construction phase: land issues, rights of way, practical environmental challenges and other delays in securing consents. This led to India's infrastructure deficit emerging as a key constraint for the country's economic growth.

India has also started work on some ambitious new projects, among them the hyperloop connecting Mumbai with Pune and the bullet train between Ahmedabad and Mumbai. The government plans to give an investment-driven push to infrastructure with investments of over $3 trillion during 2019-2024. A look at the journey so far will facilitate a robust appreciation of the opportunity and the challenge that Indian infrastructure presents for the investors.

A long road travelled

The post-1991 growth in Indian infrastructure was predicated on significant structural changes in the governing framework which sought to induce investment and build the capacities to tackle what economists call a 'shortage economy'. The 1990s heralded an early removal of barriers to private entry and ownership, which included facilitating foreign direct investment (FDI) with benefits such as the ability to charge and recover tariffs. To meet the welfare objectives, subsidies targeting specific consumer sectors and life-line supplies were to be announced and provided for by the government while distancing the government from the day-to-day operation of utilities.

There is a delicate rebalancing at play between left-leaning welfare impulses and investment-led growth-oriented governance

State owned utilities were unbundled along functional lines and reorganised into board managed companies (public, private and joint) to achieve greater accountability and efficiencies. Operational aspects – entry, pricing, quality, operations and safety of utilities – were to be regulated, either by economic regulators or contracts. The allocation of precious public resources – be they licences to operate, land or rights of way, spectrum, coal and other minerals – was gradually migrated to a transparent mechanism of auctions.

In this journey, India came a long way from state-owned and controlled monoliths to a partially competitive regulated market where corporates under state, public, private and joint ownership compete in power, railways, ports, highways and telecommunications. Some distortions constrained the effectiveness of the reform due to the pre-1991 'licence-raj era' mindset of those implementing the reforms. There was often a palpable pro-state bias in risk allocation, both in contract design and implementation, which destabilised the level playing field in the name of moral hazard / public interest. Moving from the era of consumer apathy of state-owned utilities, utilities with private involvement were subjected to a pro-consumer bias, weakening the commercial/economic equilibrium of the underlying investment. This populism eroded the bankability of such investments, which ought to have secured reasonable returns on investment after recovering prudent costs, while securing affordable and reliable infrastructure services for citizens.

By 2013, the Indian economy was reeling under a creditworthiness contagion that was spreading due to an increase in stressed loans and the large sum owed by financially crippled loss-making state-owned utilities. The resultant twin balance sheet problem with stranded investments and a stalled pipeline of public-private projects (PPPs) arose due to regulatory lag and slow judicial process, exacerbated by state government interference in regulation and operations. There were instances of discriminatory treatment in favour of state enterprises in procurement, resource allocation and the granting and pricing of open access to bottleneck infrastructure. Regulators and grantors of concessions have lacked the willingness to charge economically viable tariffs while failing to release subsidies, crippling the finances of utilities. Governance in state-controlled utilities has been compromised by being irrationally populist.

The last five years; the next five years

Against this backdrop, the National Democratic Alliance (NDA) government initiated some significant structural reforms for infrastructure in 2014-19. To recount a few –

  • To improve contract enforcement, the Arbitration & Conciliation Act, 1996 was amended in 2015 to enable speedy completion and timely enforcement of awards while restricting court interference.

  • Recognising the economic logjam due to the twin balance sheet problem plaguing investment flows and the accumulation of stressed and bad loans (non-performing assets – NPAs), the Insolvency & Bankruptcy Code, 2016 (IBC) was enacted by the federal parliament. It provided for a speedy debt resolution and bankruptcy process that recognised the time value of money (TVM) concept. Some early resolutions indicated a strong potential for reviving good quality operating assets at attractive values through the IBC route unlocking value, after having gotten rid of the accumulated default capital/interest froth.

  • An expert committee under the stewardship of Dr Vijay Kelkar was appointed to evaluate and propose solutions to problems in the PPP model for infrastructure development. This culminated in a comprehensive report three years ago, pursuant to which the government enacted changes in law and budgetary announcements on a couple of issues.

  • The Specific Relief Act, 1963 was amended on October 1 2018, seeking to protect infrastructure projects from protracted disputes in courts and injunctions and providing for time bound resolution by special courts empowered to use expert testimony.

  • The July 2019 budget emphasised certain sources to finance the ambitious infrastructure targets, including innovative instruments such as Infrastructure Investment Trusts (InVITs) and Real Estate Investment Trusts (REITs).

  • PPPs have received a fillip as the preferred mechanism to finance major projects in railways and logistics modernisation.

  • Recognising the potential of locked-in value in land banks and brownfield assets, it is now a declared policy to monetise them to garner funds.

The Economic Survey of India and the budget both contain directional indicators of the expected reforms and a charter for the next five years with an ambitious government investment target of Rs100 lakh crores (around $1.5 trillion) in infrastructure . Private investment/FDI is expected to be of a similar magnitude.

FDI and foreign portfolio investment (FPI) are increasingly being tapped by the Indian economy to fund infrastructure. FDI in the infrastructure sector is mostly through the 100% automatic route requiring no further governmental approval. Foreign investments in sensitive areas (air transport services and telecommunication services) are limited to 49% through the automatic route – foreign investment beyond 49% requires government approval. Similarly, FPIs are another important source of cross-border investment.

The Government of India (GoI) has announced that the statutory limit for FPI investment will be increased from 24% to sectoral foreign investment limits though the additional tax on FPIs seems to have queered the pitch for now. Another source of funds to be tapped for the government is external borrowing, expecting attractive interest rates. If the government succeeds, there will be more domestic funds for the private sector. To implement this vision, the ministries and regulatory institutions are now feverishly engaged in laying out the implementation road-map to address the stranded capital (twin balance sheet problem of banks and corporates) and structural flaws in the market design and regulatory architecture.

Changing attitudes of the courts

  • Change in policy/law for nationalised commodities – grounds for restitution: As a first in common law countries in Energy Watchdog (2017), the Supreme Court of India had recognised change in national policy and drastic reduction in availability of coal to power plants in a nationalised commodity leaving stranded capacity as a ground for restitutive relief to the generator even if it leads to higher than bid tariff. This judgment came in context of the vested rights of a generator (contractual and statutory).

  • Obligation to pay in contracts: In Nabha Power (2018), the Supreme Court enforced the express stipulations of the contract based on the commercial efficacy rule in favour of a private generator, rejecting an attempt by subordinate regulatory authorities to reinterpret the contract and transfer the fuel risk to the generators. The court rejected populist arguments that this would lead to a higher tariff for consumers.

  • Right to terminate contract (2019 July): In Adani Power case, the generator had agreed to a long-term supply of power to a state procurer based on the assurance given by another state entity of the supply of the entire fuel requirement (4 million tonnes of coal). The fuel supply commitment was withdrawn. Faced with this situation, Adani Power issued a termination notice under the PPA. The Supreme Court of India, relying on the Officious Bystander Test (2009, Privy Council), held the termination to be valid and rejected populist public interest argument.

  • In Shivashakti Sugars Limited v Shree Renuka Sugar Limited (2017), the Supreme Court emphasized that courts must assess the impact of its decisions in context and mould relief to attain ends of justice. In this case, court protected significant investments made in a sugar factory, noting the underlying interest of employees, lenders and farmers rather than take a technical view.

Assessing the value and risk propositions

To assess the value and risk propositions in potential infrastructure investments, besides appreciating the policy framework, it is important to start with the idea that infrastructure is seen as a public good in India, where welfare (affordability) intersects the market mechanism. Regulation of infrastructure and providing access for the poor involve a clash of primacy between contractual rights versus public interest; salvaging sunk investments while safeguarding interest of the public at large (by state or judicial action).

The public trust doctrine enjoins upon the state to protect resources for the enjoyment of the general public, safeguarding against abuse for commercial purposes. It puts an implicit embargo on the rights of the state to transfer public property to private parties, if such a transfer affects the public interest. It also encourages affirmative state action for the effective management of natural resources. There is a recognition of sovereignty of peoples and nations over their natural resources. This principle is enshrined in Article 39(b) & (c) of the Constitution of India, putting a trusteeship role on the state. It mandates that state policy and action must ensure that ownership and control of material resources are distributed to best further and subserve the common good and that the economy must not result in a concentration of wealth and means of production to the common detriment.

There always remains a risk of judicial intervention or policy change bordering on resource nationalisation from the perspective of investors. Indian judiciary has at times interfered with executive allocative decisions in order to direct the protection and proper allocation/distribution of natural resources and economic justice. The Supreme Court of India looks upon this principle as the best practical and philosophical premise and legal tool for protecting public rights and for protecting and managing resources, ecological values or objects held in trust.

This thought prominently inheres in cases of environmental protection (seen as 'polluter-pays' and 'inter-generational equity' rulings) and distribution of natural resources (seen in cancellation of allocation of spectrum, coal, iron ore, etc). Some alarming scams that rocked the corporate world and investor confidence (for example, Satyam, Kingfisher and IL&FS) have aggravated a distrust of private capital. This distrust manifests itself in cases of abuse as it also does in the preference given to public sector companies as regards the use of public resources.

Building trust in private capital

Yet in recent years there has been a shift away from a socialist attitude and a distrust of private enterprise and capital, to embracing the private sector and relying on its capital.

There has also been a parallel move in the legislative, policy and judicial spaces to emphasise the economic value of predictability and fairness of the governing regime in the balance between public and private interests. Authorities have provided relief to address the economic realities and vested contractual rights of private entities, even if it has led to tariff burdens on consumers. The most salutary among them is the recognition of return on investment as a legitimate compensation for cost of debt and equity capital, using TVM as a guiding principle; as also the long-term governance of legitimate business interests and interests of the common man. There is a delicate rebalancing at play between left-leaning welfare impulses and investment-led growth-oriented governance. Let us examine how this evolving reality has panned out.

In the Reliance Natural Resources case (2010), the Supreme Court of India set aside a family settlement to hold that the allocation of natural gas made by the state cannot be interfered with through a private arrangement. Natural gas was declared a resource of the state and of national importance, and its supply could only be made in accordance with state policies re. quantity and price.

The budget has reiterated its faith in the market

In certain cases involving illegal and environmentally harmful iron ore and bauxite mining (2010-2014), the Supreme Court of India halted illegal mining and pilferage, which was causing environmental degradation and deforestation. After a detailed examination and expert input, Supreme Court has laid down guidelines to govern such mining and permitted it. In 2G spectrum case (2012), the Supreme Court of India struck down 122 spectrum licences issued on a first-come-first-served basis as being undervalued, arbitrary and discriminatory. It held that a publicised auction is the best method to secure a transparent and fair method of alienating natural resources while sub serving the public good.

In 2012, the Indian Supreme Court recognised that auctions may be the best way of maximising revenue, but that maximising revenue may not always be the best way to further the public good. As such, despite being a preferable method for the allotment of natural resources, auctions are not the only permissible way to harness of natural resources, leaving it to lawful policy choices.

The coal industry in India had been nationalised in 1973 along with banking and other sectors. The Supreme Court of India has time and again held that coal is mined and distributed through a state monopoly, which must act to subserve the public good and not merely with an intent to maximise revenue. In the cancellation of a coal mine allocation case of 2014, the Supreme Court struck down a mechanism in existence for 20 years as being unreasonable and arbitrary. Ever since, coal mines have been reauctioned under a new regime. Recent changes in the law in 2015 appear to open scope for commercial mining and a market mechanism.

In the Sasan Power case (2016), the Supreme Court of India held that a waiver or acquiescence between parties to a contract to alter obligations in a utility contract will not hold good when such conduct can have an adverse impact on consumer and public interest. It was mandated that such changes must pass muster upon being tested and validated by the economic regulator.

The last four years have seen a significant change, with the judiciary upholding vested contractual and statutory rights of private parties. Increasingly, the courts have recognised the importance of creditworthiness in the infrastructure sector, shifting from the age-old approach of favouring public sector undertakings at the cost of the overall health of the economy. The courts are now alive to the need to pay dues in time and to the TVM concept in the wake of rising debts and NPAs (see Box: Changing attitudes of the courts).

Pinning down the priorities

It appears that gradually but surely, the Indian executive, legislative and judicial branches appear to have converged in resolving some key constraints to the ease of doing business in India. Recognising that capital (debt and equity) comes at a price, the Indian Parliament and India's courts have now accepted that profit is a return on investment considering the risk – not unjust gains. The need of the hour is to align the political economy with growth imperatives, which is expected to inhere any reform blueprint. The political economy (the relationship between politics (government), economics (market) and sociology (civil society) must work in tandem towards providing effective reforms to the sector.

India's aspiration to become a $5 trillion economy by 2024-2025 cannot be achieved without rejuvenating Indian infrastructure. The outcome will depend on how the four factors of economic growth – capital, labour, entrepreneurship and land/natural resources are unshackled and unleashed. The budget has reiterated its faith in the market and the fact that the private sector is India's job and wealth creator. India is well poised to grow into an infrastructure behemoth, with the government promoting FDIs and FPIs in the sector, strengthening innovative finance and enunciating policies conducive for foreign investments.

Increasingly the policy makers, law makers and courts appear to be conscious of the importance of securing of creditworthiness and viability of investments, while pursuing welfare objectives with respect to infrastructure facilities. There is a steady shift away from the age-old approach of favouring public sector undertakings at the cost of the overall health of the economy.

India remains sensitive to the fact that in spite of several measures undertaken in the recent times, it still ranks 63rd out of 140 countries in infrastructure. Indian governance would benefit by paying heed to the observations of Chief Justice Kapadia in the Vodafone case (2012) that certainty and stability are integral to rule of law, with rational economic choices being incorporated in treaties and laws, as well as those of Justice Radhakrishnan in the KT Plantation case (2011) that: a foreign investor must be assured that when he/she is subject to the legislative control of the host country, rule of law prevails there.

Surely the last word is yet to be written on this evolving situation.

About the author



Amit Kapur

Joint managing partner, J Sagar Associates

New Delhi, India

T: +91 11 4937 0630



Amit Kapur has been a partner with J Sagar Associates since 2000. He has led the firm's infrastructure practice since 1997, with a focus on regulatory and policy practice (including public procurement and PPPs). Having served as senior partner of JSA since April 2017, in January 2019 Amit became the firm's joint managing partner.

His practice focusses on dispute resolution and transactions in: energy (power and hydrocarbons); transport (rail, highways and civil aviation); communications; municipal infrastructure; and social/developmental projects. He is regularly consulted on infrastructure, regulatory and PPP issues by several ministries and bodies of central and state government; developmental financial institutions; competition and sector regulators; and leading Indian and foreign corporates (including Tata Group, Reliance ADA Group, Adani Group, GVK Group, GMR Group, Vedanta Group, Larsen & Toubro and Torrent).

Amit assisted the Kelkar Committee on the Rejuvenation of Infrastructure Development (2015) and served as member of the Ministry of Law-appointed committee to review the Specific Relief Act, 1963. Amit has been associated with several precedent-setting infrastructure and PPP projects, such as the Delhi electricity privatisation, Metro Rail projects in Mumbai and Delhi and the first three ultra-mega power projects.

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