IRDA examining tweaking cap on infra investment

New Delhi: the Insurance Regulatory & Development Authority (IRDA) today said it is examining a proposal for removing cap on investment in infrastructure bonds of highly-rated companies by insurers, a move which would up fund flow in the crucial sector, reports PTI.

"We are examining the proposal ... There is a request to that extent which has come. We are analysing that," IRDA chairman J Hari Narayan told reporters on the sidelines of a Confederation of Indian Industry (CII) Health Insurance Summit.

The current regulations allow insurance companies to invest only in highest rated 'AAA' or 'AA' credit-rated debt paper. Also, at least 75% of investment for every fund in debt instruments in the case of life insurers.

For general insurance companies, the investment assets of general insurers should have an 'AAA' rating.

"We do not see any need for changing the current rules, which provides for 15% of the investment of the controlled debt fund has to be in infrastructure," he added.

Earlier this year, the Deepak Parekh committee on infrastructure financing had advocated that insurers be allowed to invest in secured debt with a 'BBB' rating, usually considered investment grade.

Mr Hari Narayan, however, ruled out any relaxation saying, "Allowing for investment below 'AA' grade may be risky."

Besides Life Insurance Corporation of India (LIC), IDFC and IFCI, infra bonds can be issued by a non-banking finance company (NBFC) that gets classified as an infrastructure finance company by banking regulator Reserve Bank of India (RBI).

The Centre expects $500 billion investment in infrastructure in the 11th Plan period ending March 2012 and has doubled the target to over $1 trillion for the 12th Plan.

Analysts said with the current level of infrastructure facilities, it will not be possible to sustain high economic growth rate.

"The regulator's office will not stand as a roadblock in building roads. But at the same time we cannot be digging potholes in the roads of investors money," Mr Hari Narayan said.


Cannot rule out 30%-40% correction in gas T&D companies: Kotak

Street expectations about Indian gas transmission and distribution companies are largely based on hope, says Kotak. Almost all these companies earn returns that are well above the stipulated returns fixed by the regulator — and therefore they are highly vulnerable to corrective regulatory action

In a scathing report, Kotak Institutional Equities Research lambasts the Street's high expectations from gas T&D companies and "the regulator's lackadaisical approach to implementing its own regulations," which Kotak believes, has perhaps led to "expectations that the regulator will continue to allow Indian gas T&D companies to earn returns well above regulated levels." It also strongly disagrees with "the Street's expectations about large LNG imports at high re-gasification tariffs in the future that support Petronet LNG's current rich valuations."

Obviously, Kotak believes that regulatory action will come sooner rather than later, though it does not particularise this in its report. But this is apparent from its statement: "A few investors have argued that the regulator may allow companies to earn supernormal returns (as is the case currently) so as to develop infrastructure in India. We find these arguments and investor concerns about infrastructure development in India rather self-serving."

Kotak goes on to clarify that it does not really know when and if the regulator will follow its regulations and decide on tariffs that are in line with regulations. But it goes on to assert that "investors should not base investment decisions on unknown factors."

To make its argument it points out to the sharp rise in the Reliance Industries price in 2007 which was due to unrealistic expectations.

Current regulations allow Indian transmission companies to earn 12% post-tax project IRR (internal rate of return) and distribution companies to earn 14% post-tax project IRR. The financial returns of the Indian companies as measured by CROCI (Cash Return On Capital Invested) suggest that they are earning returns that are well above stipulated levels (GAIL: 20%, Gujarat Gas: 30%, Gujarat State Petronet: 23%, Indraprastha Gas: 28%, Petronet LNG: 18%).

Gas transmission tariff regulations are effective 20 November 2008. As of now, tariffs of two pipelines (GAIL and Reliance Gas Transportation Infrastructure) are fixed. However, Kotak points out that according to its own calculations for GAIL's HVJ system, the pre-tax IRR exceeds 50% compared to the stipulated 18%! Kotak actually goes on to suggest a review of the workings of the regulator.

The broker focuses on Gujarat State Petronet and Petronet LNG (PLNG) and says that it finds the valuations they are trading at quite absurd (especially at economic value/gross cash invested) and that they are factoring in strong volume growth over the next few months and 'high' tariffs both of which it finds risky assumptions. The Street, Kotak says, is even willing to give value for pipelines that are yet to be bid by GSPL.

In PLNG's case, a 38% or Rs24 billion rise in market capitalisation in just 50 days since RIL announced a delay in ramp-up in gas production in its key KG D-6 block suggests that the Street now expects that India will not see major gas discoveries in the future and/or PLNG would be in a position to increase its tariffs in perpetuity, says Kotak. Both these assumptions seem stretched. Kotak also points out that large LNG imports are not very likely into India since it will not be a substitute for domestic gas for power generation - companies would rather put up coal-based plants than put up with the uncertainty of imported gas.

PLNG has increased re-gasification tariffs by 5% per annum since its inception. But there does not seem to be any basis to this annual increase (incidentally allowed by the oil marketing companies who are PLNG's major shareholders).

While the report makes a good effort to lay bare the slip between the cup and the lip as far as gas regulation and implementation is concerned, a statement made by a wise man called John Maynard Keynes does come to mind - markets can remain irrational longer than you can remain solvent. So while the gas regulator does not make any substantial moves towards actually implementing regulations, the so-called irrationality in valuations may well continue. Incidentally, Moneylife had written an article on 17th July (see: saying that the gas regulatory board has got real teeth now that Section 16 of the PNGRB Act of 2006 has been notified with effect from 15th July and had talked about the positive impact on stocks such as IGL, GSPL, Petronet LNG, and Gujarat Gas.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


MSP Steel & Power to set up Rs226 crore pellet plant in Raigarh

Kolkata-based MSP Steel & Power Ltd said it will set up 600,000 million tonne per annum (mtpa) of pellet plant at Raigarh in Chhattisgarh with a total project cost Rs226 crore.

The company aims to expand the capacity of its pellet plant from 300,000 mtpa to 900,000 mtpa. It has achieved the financial closure for debt funds of Rs150 crore. DBS Bank has sanctioned external commercial borrowings (ECBs) of around Rs70 crore and the remaining funds is financed by the Union Bank, Corporation Bank and Dena Bank.

On Thursday, MSP Steel & Power shares ended 1% down at Rs60 on the Bombay Stock Exchange, while the benchmark Sensex closed 0.7% up at 18,799 points.




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