RE Financing Mechanisms 4 th EQ Clean Tech Finance Summit 28-July-2016, Shangri La Hotel, New Delhi

Structure 2 Brief Introduction to EVI Green Bonds Infrastructure Investment Trusts

EVI – Sustainability Dedicated with wide Bouquet of Services Climate ChangeRenewable EnergySustainability Policy, Strategy Technology Finance Carbon credits, ODS, NAMAs, NAPAs, special types of environmental credits. One of the largest in the field Carbon credits, ODS, NAMAs, NAPAs, special types of environmental credits. One of the largest in the field 8000 MW+ of RE Design, Development, Project Execution, Financing, Operations Wind, Solar (Ground Mounted, Roof Tops) Wind Solar Hybrids, Hydro 8000 MW+ of RE Design, Development, Project Execution, Financing, Operations Wind, Solar (Ground Mounted, Roof Tops) Wind Solar Hybrids, Hydro Corporate Sustainability Waste, Water, Transportation, Sustainable Habitats, Promotion of Clean Technologies, Green Products Corporate Sustainability Waste, Water, Transportation, Sustainable Habitats, Promotion of Clean Technologies, Green Products Presence in 25+ countries; ~100 people team

NEW FINANCING INSTRUMENTS

Challenges of RE financing and the new approach needed 5 $200 bn+ new debt and equity needed by 2022 Long term investors Investors need exit options low interest costs; low discounting rates for equity Low interest rates and low discounting rates are possible with risk mitigated, diversified ring fenced, project portfolios with no development risks Large investors with long tenor, low risk, low cost capital – pension funds, sovereign wealth funds, insurance co etc Liquidity of instruments, helps attract large scale investors. High level of tax efficiency helps reduce the cost of debt/ equity Market Needs New Approach

Reduced risk profiles of operating RE Assets 6 Resource assessment risks Site acquisition risks, delays, costs, non availability Evacuation access risks Other permits and consents related risks e.g environment, local community etc. Project execution risks, costs; delays Technology performance risk Credit Risk Force Majeure Event risks Development Operating Asset Equity Discounting rates 18-22% 10%-14% Depending on tax efficiency and residual risk for equity investors

Clean Energy is becoming increasingly attractive for investors, due to long term economics 7 * R(C )- R(RE) Time ---  Inflation, as fossil fuel run out their availability Environmental costs Falling costs of RE; repowering at the same sites * R (C): return on conventional power; R(RE) – return on RE without subsidies

New Financing Instruments 8 Solutions which are Scalable, Liquid will attract wide participation (including domestic and foreign investors) – Green Bonds – debt with lower cost (by 2%-3%/a), long tenures (15 yrs+), flexible structure (allowing better leveraging depending on cash flow from assets) – Investment Trusts – for equity investors seeking low risk-low return investments With – Appropriate tax provisions, – Simplification of investment rules – Availability of Risk mitigation/management products Can lower the Cost of Finance significantly to reduce/eliminate subsidies (capital subsidy, VGF, GBI) and accelerate adoption of renewable energy

Financing Conveyor Belt- new instruments can accelerate 9 DevelopmentConstruction Post Construction Asset Aggregation Public markets Current option - Bank Finance No Exits, sector limits, NPAs, ALM Green Bonds, REITs – allow exits Promoter’s funds + limited private equity; NBFCs; few exits yet, hence the finance belt seems to be stalling Promoters Private Equity NBFCs Promoters Private Equity NBFCs OEMs Supplier’s Exim Finance NBFCs Private equity OEMs Supplier’s Exim Finance NBFCs Private equity Banks Green Bonds or equivalent instruments NBFCs Pvt Equity Banks Green Bonds or equivalent instruments NBFCs Pvt Equity Banks Green Bonds IDFs INVITs Investments by Large wealth funds, pension funds, sovereign wealth funds, HNIs, Public Banks Green Bonds IDFs INVITs Investments by Large wealth funds, pension funds, sovereign wealth funds, HNIs, Public

GREEN BONDS - SCALABLE ACCESS TO DEBT

Green Bonds 11 Green Bonds Fund RE Projects Fixed interest, long tenor Improve Liquidity Funding across Project Cycle Renewable Energy is one of top priority areas for Green Investments. >$30 tn +asset managers special priority for Green Borrowers get benefits of lower cost, fixed interest (v/s variable for bank loans), longer tenure, and non recourse options of financing. Corporates issuances are increasing rapidly; 30% + issuances by corporates Can be listed on Alternate Investment Markets in London Singapore, or other similar exchanges Can be traded bilaterally as well, as they use risk mitigated, ring fenced structures Raise long term debt for new projects Re-finance long term loans Re-finance construction loans This year (2016) green bond issuances may touch $100 bn. Masala (RE) Bonds issued. Many Indian issuers on the market

Costs of Finance can potentially be reduced by ~ 1-1.5% by properly designed green bonds However initially issuers should seek new investors, faster access to capital. With time and performance track record, costs can fall % 2.5% Libor (6m) Credit risk premium AA 1.18% Floating to fixed interest rate swap 10 yrs+ currency hedge costs 4.8%: Long term inflation rate differential* 2.2%: liquidity, volatility, political risks (1) 0.6%Withholding tax 0.5%Issuance costs Potential for reduction of %, with size, policy change etc. With an exchange rate liquidity facility can be reduced by ~ % Partial risk guarantee schemes can lower by ~ %, next of cost of facility for lower rated bonds ~ % For well rated Fis will be lower by % Green attributes, addressing right investors, risk mitigation, credit enhancements create ‘value for green bonds and keep the costs at lower levels % ~11.4% July 2016

Green Bonds are valuable to borrowers, not so much for cost reasons, but for ‘growth’ and ‘business value’ 13 Additional cash for growth With bullet payments and longer tenors, larger cash- flow to equity which can be used for growth Can Improve the potential growth rates by 30%-50%/a for the same equity base Very valuable for ‘aggregators’ in capital hungry infrastructure businesses Valuable for fast growing NBFCs supporting RE Sector High cost equity partly replaced by low cost debt Equity cost 18%; debt costs (post tax) ~ 10.5% Overall cost of capital falls. Hence even if costs are higher, if higher debt can be used it is beneficial Access to Debt, can be non recourse Access to Debt, can be non recourse If initial issuances do well, access to capital is superior from a bond market for fast growing corporates

INVESTMENT TRUSTS- SCALABLE ACCESS TO EQUITY

SEBI Issued guidelines exist for Infrastructure Investment Trusts 15 Inv. Trust Project 1 Sponsor Inv1 Inv2 Inv n Trustee Investment Manager Investment Manager Project Manager Sponsor Transfers Assets/ majority SPV stock to the Trust Investors invest in the Trust based on independent valuation; receive units from the Trust, which are listed on a stock exchange Trust pays in cash and in ‘units’ (shares) to the sponsor. Sponsor needs to hold a minimum stock in the Trust Investment Manager – manages asset acquisitions, divestments, investor related processes (incl. listing and trading, distribution of cash/dividends, legal compliances, valuation accounting, audits and reporting) etc. Project Manager – operates and manages assets for efficient performance Trustee- ensure that investor interests are protected.

Renewable Energy Investment Trusts 16 Investment Trusts Attracts Yield Seekers Tax efficient Listed, Liquid Low risk assets Attracts large, low risk investors such as Pension Funds, Insurance Companies, HNIs, Soverign Wealth Funds etc. Also Sharia Compliant- meets Islamic Finance requirements Maximises cash distribution – 80%+ of distributable cash needs to be distributed, by law. In most domains globally, the structure offers tax efficient ways of investing Asset acquisition strategy maximizes availability of tax shelters/ credits. Examples- Singapore Business Trusts Master Limited Partnerships (USA) Listed on stock exchanges Norms to ensure wide public participation. Considered better than investing in utilities, because it isolates development risk Re-finances operating RE assets- lower risk Limits on investing in non operating or financial assets; limited leverage Diversifies risks through the asset portfolio High standards of governance

How Investment Trusts may help refinance and RE development processes 17 Releases cash/equity for the developer This cash can be –re-used by the developer to develop future assets. A typical development cycle lasts for 2 years. Very valuable for ‘aggregators’ in capital hungry infrastructure businesses. Once a trust is listed it can keep acquiring assets through follow-on issuances Provides exits for private equity players. Developers are able to lock-in development premiums by developing projects rapidly and transferring to the Trusts For investors: the risks of development/ construction phases are not passed on to them High cost equity replaced by equity capital with low discount Asset risk is low. Yields in developed markets hover at 4%- 6%. In India they can can be 10%- 12%, which is lower than 16%-20% expectations of Private Equity. The developer can retain stake, while releasing its capital Tax efficiency In most regimes, the structure is allowed to pass through the tax benefits of assets to investors. This can be very attractive to investors

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SEBI 26 Sep 2014 Guidelines 19 SizeShareholdingGovernanceInvestmentsDistribution The size of the trust > Rs 500 Cr; with > 250 Cr value of units offered to investors Sponsor needs to have >Rs 100 Cr net- worth, or in case of LLPs > Rs 100 Cr asset size. Minimum Investment ~Rs 10 lacs/investor Sponsors need to hold > 25% stake. Lock-in period of 3 yrs. Strategic investors need to hold > 5% stake Public needs to hold > 25% stake. Only one type of units allowed to be issued, with equal rights. Trustees- need to SEBI registered Investment Manager – need to have Rs 10 Cr net-worth, > 5 yrs experience as Fund Manager, Advisor or Developer. ½ yrly valuations Leverage: (all aggregated debt, and deferred payments < 49% of asset value. Trustees, Sponsors, Investment Manager, Valuer need to be independent 80%+ investments need to be in operating assets <10% investment in under construction assets. Balance can be in financial assets/ securities in the Infra sector No investment in another infra Trust 90% of more of net distributable cash needs to be distributed. -doesn’t define net distributable cash (e.g can cash be kept for reserves?) No clarity on tax provisions.