 "Is India's renewable energy sector ready to embark on Yieldco model?")
As India's renewable energy sector gets on to massive capacity addition, a yieldco-type model might come sooner than expected, though experts say prior taxation changes are needed.
A yieldco is the term for a company created to manage operational capacity, through investment by various entities. Since it manages completed projects, it gives investors low-risk return in the form of dividend income.
Hemal Zobalia, partner, Deloitte Haskins & Sells, says this model could boost the sector and provide needed support for companies planning to list in the coming years. “Currently, if a company goes for public listing, all projects — good, stalled or under construction — are pooled for valuation purposes and discounted together. Whereas the yieldco model provides an alternative funding avenue to monetise the good assets at higher valuation and use the money towards stalled projects for further development,” he says.
In addition to easing pressure on the banking sector, it would provide alternative resources to capitalise investments, such as long-term capital from provident funds, pension funds, insurance companies, etc. “We have seen a sizable number of REITs (real estate investment trusts) established around the world, with capital of billions of dollars. The US Reit industry size is $600-650 billion, more than 50 per cent of the existing REIT market size,” he said.
Rahul Munjal, managing director, Hero Future Energies, said adopting a yieldco could help companies get access to larger sums of lower cost and longer term capital, and intensify competition among renewable energy companies, bringing down the cost of energy.
Globally, yieldcos are managed by financial institutions and groups of large business players. “In the Indian context, we are still in an early stage and, to be precise, yet to list any REIT or InVIT (infrastructure investment trust). So, it would be too early to comment on that,” said Zobalia.
In more developed markets, yieldcos are generally seen as a stable and long-term investment. The unexpected volatility in the world market in recent times has affected this, however.
“The yieldco market, however, is quite nascent and I am sure in the coming times, it will fund and own a significant proportion in renewable funds,” said Munjal.
Zobalia said certain tax rules in India were preventing development of yieldcos that are similar to REITS for the real estate sector. The government, though, has been changing some of this, as in the policy on foreign direct investment, investment guidelines of pension funds, etc.
However, he said, the sector expected some more. For instance, clarifications on the period of holding of units, set-off of past tax losses by Special Purpose Vehicles and deferral tax provisions in the case of transfer of assets directly to a REIT or InVIT.
Munjal said a favourable dispensation in distribution taxes (which include dividend and withholding tax) was the first important step.
To begin the process, institutional investors could come out with private and public yieldcos.
A yieldco is the term for a company created to manage operational capacity, through investment by various entities. Since it manages completed projects, it gives investors low-risk return in the form of dividend income.
Hemal Zobalia, partner, Deloitte Haskins & Sells, says this model could boost the sector and provide needed support for companies planning to list in the coming years. “Currently, if a company goes for public listing, all projects — good, stalled or under construction — are pooled for valuation purposes and discounted together. Whereas the yieldco model provides an alternative funding avenue to monetise the good assets at higher valuation and use the money towards stalled projects for further development,” he says.
In addition to easing pressure on the banking sector, it would provide alternative resources to capitalise investments, such as long-term capital from provident funds, pension funds, insurance companies, etc. “We have seen a sizable number of REITs (real estate investment trusts) established around the world, with capital of billions of dollars. The US Reit industry size is $600-650 billion, more than 50 per cent of the existing REIT market size,” he said.
Rahul Munjal, managing director, Hero Future Energies, said adopting a yieldco could help companies get access to larger sums of lower cost and longer term capital, and intensify competition among renewable energy companies, bringing down the cost of energy.
Globally, yieldcos are managed by financial institutions and groups of large business players. “In the Indian context, we are still in an early stage and, to be precise, yet to list any REIT or InVIT (infrastructure investment trust). So, it would be too early to comment on that,” said Zobalia.
In more developed markets, yieldcos are generally seen as a stable and long-term investment. The unexpected volatility in the world market in recent times has affected this, however.
“The yieldco market, however, is quite nascent and I am sure in the coming times, it will fund and own a significant proportion in renewable funds,” said Munjal.
Zobalia said certain tax rules in India were preventing development of yieldcos that are similar to REITS for the real estate sector. The government, though, has been changing some of this, as in the policy on foreign direct investment, investment guidelines of pension funds, etc.
However, he said, the sector expected some more. For instance, clarifications on the period of holding of units, set-off of past tax losses by Special Purpose Vehicles and deferral tax provisions in the case of transfer of assets directly to a REIT or InVIT.
Munjal said a favourable dispensation in distribution taxes (which include dividend and withholding tax) was the first important step.
To begin the process, institutional investors could come out with private and public yieldcos.
