Variable Bonds for HAM Projects
Real Estate

Variable Bonds for HAM Projects

Under the Hybrid Annuity Model (HAM) concession agreement, NHAI  has agreed to pay interest on developers’ capital at bank rate plus 3 per cent. Developers’ capital includes equity and debt amount infused in a project by the developer. Under the HAM concession agreement, typically, 40 per cent of the project cost is financed by NHAI and 60 per cent is financed by the developer. This was evolved in view of financial crunch faced by developer and bank’s reluctance to fund entire project cost. Banks have taken the brunt of non- performing assets (NPAs) due to default by concessionaire due to non-completion of projects for ROW issues and other contractual issues. Hence, banks have represented NHAI to partly fund the project cost to reduce their risk.

Forward-looking concept In earlier PPP model of annuity/toll roads, the developer used to fund the entire project cost. In case of annuity model, NHAI used to pay fixed half yearly installment over the period of concession. Such projects ran into trouble in view of change in bank rate. Hence, NHAI came up with a new concept of variable interest rate linked to bank rate.

This concept of variable interest rate was a forward-looking concept where NHAI payment was linked to the bank rate. It was on presumption that interest rates are decided by banks in a transparent and fair manner. In case the bank rate is reduced by RBI , then banks will reduce the interest rate and in case the bank rate is increased by RBI, then banks will increase the interest rate. However, due to increased NPA and higher fixed deposit interest payout, the bank’s lending cost has increased substantially. Hence, banks have not reduced their interest rate on lending to borrowers in same quantum of bank rate reduction by RBI. The table below gives the movement of RBI repo rates and SBI MCLR and HDFC MCLR rates:

Updated on

RBI repo rate ( per cent)

SBI MCLR (1 year) ( per cent)

HDFC MCLR (1 year) ( per cent)

May 22, 2020

4.00

7.00

7.65

March 28, 2020

4.40

7.40

8.15

October 4, 2019

5.15

8.05

8.35

August 7, 2019

5.40

8.10

8.60

June 6, 2019

5.75

8.30

8.70

April 4, 2019

6.00

8.35

8.70

February 7, 2019

6.25

8.55

8.75

August 1, 2018

6.50

8.25

8.40

June 6, 2018

6.25

8.25

8.40

                                                                                                     Source: Equirus Capital

It is evident from the aforesaid table that in the last two years RBI has reduced bank rate by 2.25 per cent. However, SBI has reduced its interest rate by 1.25 per cent and HDFC has reduced its interest rate by 0.75 per cent only.

Variable interest rate loan and bonds

A new lending product can be introduced by banks for HAM project. This new lending product will charge interest rate based on RBI repo rate. This clause can be included in loan agreement. Thus, for HAM projects, the lending rate will be linked to RBI repo rate instead of MCLR. This can be done for projects which achieved rating above a minimum criterion. NHAI enjoys AAA rating, which is the highest. Due to NHAI as counter party, HAM projects will also enjoy AAA or AA rating based on their capital structure and equity infused by the developer. This will incentivise developers to infuse fair equity to achieve AAA rating for their projects. This will also insulate them from adverse interest rate movements.

Similarly, the bond market can also be developed where variable interest rate bonds are floated for HAM projects having higher ratings like AAA or AA. This will help developers to tap alternate source of funding in addition to bank financing. The development of variable bond market will also help to reduce lending pressure on banks.

RBI issues Floating Rate Notes (FRN) on regular basis. For example, RBI has issued notification for issue of FRN for Rs 30 billion on May 22, 2017. The interest rate payout was proposed as under:

The variable coupon rate for payment of interest on subsequent semi-annual period shall be the average rate rounded off up to two decimal places, of the implicit yields at the cut-off prices of the last three auctions of Government of India 182 day Treasury Bills, held up to the commencement of the respective semi-annual coupon period. The implicit yields will be computed by reckoning 365 days in a year.

Thus, floating rate bonds or loans are not a new phenomenon in market. It has been used by RBI regularly for raising funds from market. The same principle can be applied for bonds issued or loan given to HAM projects. This will mitigate interest rate risk for HAM project developers and save such projects from becoming NPA or face bankruptcy proceedings.

About the author: Vijay Agarwal, Executive Director, Equirus Capital, heads the firm’s real-estate practice. He advises clients in fundraising by way of private equity, structured finance and debt and capital markets like IPO, QIP, PIPE, and is active in the M&A space and is working with clients in real estate, infrastructure, e-commerce, pharma, retail, manufacturing and other sectors.

Under the Hybrid Annuity Model (HAM) concession agreement, NHAI  has agreed to pay interest on developers’ capital at bank rate plus 3 per cent. Developers’ capital includes equity and debt amount infused in a project by the developer. Under the HAM concession agreement, typically, 40 per cent of the project cost is financed by NHAI and 60 per cent is financed by the developer. This was evolved in view of financial crunch faced by developer and bank’s reluctance to fund entire project cost. Banks have taken the brunt of non- performing assets (NPAs) due to default by concessionaire due to non-completion of projects for ROW issues and other contractual issues. Hence, banks have represented NHAI to partly fund the project cost to reduce their risk. Forward-looking concept In earlier PPP model of annuity/toll roads, the developer used to fund the entire project cost. In case of annuity model, NHAI used to pay fixed half yearly installment over the period of concession. Such projects ran into trouble in view of change in bank rate. Hence, NHAI came up with a new concept of variable interest rate linked to bank rate. This concept of variable interest rate was a forward-looking concept where NHAI payment was linked to the bank rate. It was on presumption that interest rates are decided by banks in a transparent and fair manner. In case the bank rate is reduced by RBI , then banks will reduce the interest rate and in case the bank rate is increased by RBI, then banks will increase the interest rate. However, due to increased NPA and higher fixed deposit interest payout, the bank’s lending cost has increased substantially. Hence, banks have not reduced their interest rate on lending to borrowers in same quantum of bank rate reduction by RBI. The table below gives the movement of RBI repo rates and SBI MCLR and HDFC MCLR rates: Updated on RBI repo rate ( per cent) SBI MCLR (1 year) ( per cent) HDFC MCLR (1 year) ( per cent) May 22, 2020 4.00 7.00 7.65 March 28, 2020 4.40 7.40 8.15 October 4, 2019 5.15 8.05 8.35 August 7, 2019 5.40 8.10 8.60 June 6, 2019 5.75 8.30 8.70 April 4, 2019 6.00 8.35 8.70 February 7, 2019 6.25 8.55 8.75 August 1, 2018 6.50 8.25 8.40 June 6, 2018 6.25 8.25 8.40                                                                                                      Source: Equirus Capital It is evident from the aforesaid table that in the last two years RBI has reduced bank rate by 2.25 per cent. However, SBI has reduced its interest rate by 1.25 per cent and HDFC has reduced its interest rate by 0.75 per cent only. Variable interest rate loan and bonds A new lending product can be introduced by banks for HAM project. This new lending product will charge interest rate based on RBI repo rate. This clause can be included in loan agreement. Thus, for HAM projects, the lending rate will be linked to RBI repo rate instead of MCLR. This can be done for projects which achieved rating above a minimum criterion. NHAI enjoys AAA rating, which is the highest. Due to NHAI as counter party, HAM projects will also enjoy AAA or AA rating based on their capital structure and equity infused by the developer. This will incentivise developers to infuse fair equity to achieve AAA rating for their projects. This will also insulate them from adverse interest rate movements. Similarly, the bond market can also be developed where variable interest rate bonds are floated for HAM projects having higher ratings like AAA or AA. This will help developers to tap alternate source of funding in addition to bank financing. The development of variable bond market will also help to reduce lending pressure on banks. RBI issues Floating Rate Notes (FRN) on regular basis. For example, RBI has issued notification for issue of FRN for Rs 30 billion on May 22, 2017. The interest rate payout was proposed as under: The variable coupon rate for payment of interest on subsequent semi-annual period shall be the average rate rounded off up to two decimal places, of the implicit yields at the cut-off prices of the last three auctions of Government of India 182 day Treasury Bills, held up to the commencement of the respective semi-annual coupon period. The implicit yields will be computed by reckoning 365 days in a year. Thus, floating rate bonds or loans are not a new phenomenon in market. It has been used by RBI regularly for raising funds from market. The same principle can be applied for bonds issued or loan given to HAM projects. This will mitigate interest rate risk for HAM project developers and save such projects from becoming NPA or face bankruptcy proceedings. About the author: Vijay Agarwal, Executive Director, Equirus Capital, heads the firm’s real-estate practice. He advises clients in fundraising by way of private equity, structured finance and debt and capital markets like IPO, QIP, PIPE, and is active in the M&A space and is working with clients in real estate, infrastructure, e-commerce, pharma, retail, manufacturing and other sectors.

Next Story
Infrastructure Transport

Tata, Airbus to Build India’s First Private Helicopter Line

In a landmark development for India’s aerospace sector, Tata Advanced Systems Limited (TASL) and Airbus will establish the country’s first private-sector helicopter assembly line in Vemagal, Karnataka. The facility will manufacture the Airbus H125 and H125M, marking a significant milestone in India’s push for self-reliance in aviation and defence manufacturing. The new Final Assembly Line (FAL) will produce the H125, the world’s best-selling single-engine helicopter, known for its versatility and performance in extreme environments. The first ‘Made in India’ H125 is expected to ro..

Next Story
Infrastructure Urban

NeGD to Support Bharat Taxi in Building Cooperative Ride Platform

In a significant move for India’s digital and mobility transformation, the National e-Governance Division (NeGD) of the Digital India Corporation, under the Ministry of Electronics and Information Technology (MeitY), has entered into an advisory partnership with Sahakar Taxi Cooperative Limited, the company behind Bharat Taxi — a first-of-its-kind, cooperative-led national ride-hailing platform. A Memorandum of Understanding (MoU) has been signed between NeGD and Sahakar Taxi to provide strategic advisory and technical support covering key areas such as platform integration, cybersecurity..

Next Story
Technology

MeitY Hosts Pre-Summit for India–AI Impact Summit 2026

The Ministry of Electronics and Information Technology (MeitY), Government of India, hosted a series of Pre-Summit events for the upcoming India–AI Impact Summit 2026 at the India Mobile Congress (IMC) 2025 in New Delhi. These sessions mark a key milestone ahead of the main summit, scheduled for 19–20 February 2026 at Bharat Mandapam, New Delhi. Delivering the inaugural address, S. Krishnan, Secretary, MeitY, highlighted India’s innovative and frugal approach to AI development. “We have adopted innovative means by learning from others’ experiences to build projects and products that..

Advertisement

Subscribe to Our Newsletter

Get daily newsletters around different themes from Construction world.

STAY CONNECTED

Advertisement

Advertisement

Advertisement

Talk to us?