2016-09-26
Is India's renewable energy sector ready to embark on Yieldco model?

A Yieldco is a company created to manage operational capacity through investment by various entities.

As India’s sector gets on to massive capacity addition, a model of companies may come sooner than expected. Experts, however, caution that unless the government makes some taxation changes, Yieldco may not be successful as yet.

Yieldco is a company created to manage through investment by various entities. Since it manages completed projects, it gives investors low-risk return in the form of dividend income. 

According to Hemal Zobalia, Partner, Deloitte Haskins & Sells, the Yieldco model can boost renewable energy sector and provide the much-needed support to companies planning to list in the coming years. 

“Currently, if the company goes in for public listing, the mix of all projects (including good, stalled as well as under construction projects) is pooled for valuation purposes and discounted together. Whereas Yieldco model provides the 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 the pressure on banking sector, it provides alternate resources to capitalize the investments such as long term capital from provident funds, pension funds, insurance companies etc. “We have seen the sizable number of REITs established around the world over with capital of billions of dollars. For instance, US REIT industry size is anywhere between $600 to 650 billion constituting more than 50% of the existing REIT market size,” he said.

Rahul Munjal, managing director, Hero Future Energies, said adopting Yieldco could help companies get access to larger sums of low cost, long term capital and intensify the competitiveness among renewable energy companies and as a result bring down the cost of energy.

Globally, Yieldcos are managed by financial institutions and group of large business players. “In the Indian context, we are still in early stage and to be precise, yet to list any REIT / INVIT so, it would be too early to comment on that,” said Zobalia.

In more developed markets, Yieldcos are generally seen as a stable, safe long term investment. Although due to unexpected volatility in the world market in recent times, even the developed markets has not shown great results. 

For instance, Terraform companies, that own and operate SunEdison’s global projects and serve as Yieldco for the parent company, had seen some trouble with their market value going down as investors mainly in conventional energy withdrew funds due to fall in oil prices. “Yieldco market, however, is quite nascent and I am sure in the coming times, it will fund and own 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 has been taking steps to facilitate the effective functioning of Yieldco models. Necessary changes have already been made in the FDI policy, investment guidelines of Pension funds etc, but as he pointed out, from tax perspective, the industry was expecting few more amendments such as clarification on the period of holding of units, set off of past tax losses carried by special purpose vehicles, deferral tax provisions in case of transfer of assets directly to the REIT / InVITs.

Munjal said a favourable dispensation of distribution taxes which includes dividend tax, withholding tax, is the first critical step. To kick start the process some financial institutional investors could come out with private and public Yieldcos, given that public Yieldcos need guidelines from SEBI.

(This news story is from Business standard)