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FTSE IDFC India Infrastructure Index to Help Promote Development of Infrastructure, Shri R V Shahi, Former Secretary, Ministry of Power

The Union Finance Minister Mr. P. Chidambaram launched a new stock market index named "FTSE IDFC, India Infrastructure Index" in a brief function at Delhi on July 24, 2007. FTSE Group (an outfit of Financial Times) in partnership with Infrastructure Development Finance Company decided to create a new infrastructure index for the stock market, in relation to the stocks of infrastructure companies. This series, it is expected, would represent the stock market performance of such Indian companies as generate major part of their revenue from infrastructure. This would also provide the investors information on sub sectors of the infrastructure which deal with Indian financial market and which have witnessed significant growth in the recent years. Inaugurating the event at the launch of this new index series the Finance Minister made following observations:

  • For an economic growth of 4-5% the present infrastructure, in most cases, would appear sufficient. But we have targeted to grow at the rate of 9% plus. And the moment we attempt to align our activities with this level of growth it exposes the weaknesses of our infrastructure all around - road, port, airport, power, railways in particular. We often compare ourselves with China. Even Malaysia has made significant progress on infrastructure facilities - good to support a high level of economic growth.

  • Money is available. Where we lack is in our preparation for good projects ripe for investments. This is an area where we need to take immediate actions on all fronts.

  • The Government has provided a revolving fund for the States to prepare projects which could then be considered for investment and development. With all our policies we are trying to support infrastructural projects in significant ways. Government is deeply committed to build world class infrastructure in India.

  • It would be necessary to promote and encourage good companies which are engaged in developing and building infrastructure and therefore, the new series which has been developed by the FTSE and IDFC would obviously enable investors to have better understanding of the performance of these companies and therefore support them with investments.

IDFC and FTSE made a brief presentation on this occasion highlighting the salient points of the new index. For the purpose of this series which would be tracked by all those who are interested in stock market operation as also those interested in these companies, the infrastructure has been defined to include the following:

In an informal chat with Shri Deepak Parikh Chairman, HDFC & IDFC and Shri Rajiv Lall MD, IDFC it was pointed out that housing is a more basic infrastructure for people and this should also be included in the definition of infrastructure. Perhaps this will require due consideration.

Under this initiative two new Indices have been developed.

  • FTSE IDFC India Infrastructure Index

  • FTSE IDFC India Infrastructure Thirty Index

The first index will cover the entire eligible universe of infrastructure companies in India. The second, index would represent top 30 constituents of the eligible universe by full market capitalization.

The main features of the index are as follows:

  • Companies must have a full listing on either the National Stock Exchange or the Mumbai Stock Exchange

  • Companies must generate a majority of their revenue from infrastructure

  • Companies must conform to FTSE's free float, liquidity rules and size criteria

  • The FTSE IDFC India Infrastructure Index Series will be reviewed on a semi-annual basis in March and September

  • At review the index methodology provides stability and reduces turnover in the selection of index constituents

  • The indices are managed according to a transparent and public set of index rules

A shadow working of the performance of the infrastructure companies with reference to the new series have been highlighted in the following two charts.

It may be seen that as compared to June 2002, in a five year time frame, the infrastructure index has grown ten times, whereas the FTSE India, all Capital Index has grown six times, a point which Union Finance Minister particularly observed during the inaugural speech. It could also be seen that while in the 6 years period November 2001 to May 2007 the Nifty 50 index and Sensex 30 index has grown from 100 (taking 2001 as reference point) to about 400 the infrastructure index has grown from 100 to 700 in case of Infrastructure 30 Index and 850 in case of Infrastructure Index.

It is very interesting to find that the top 10 of the FTSE IDFC India Infrastructure 30 Index, which has 73% weight in the overall computation, has as many as six companies from the energy and power group, which can be seen from the following table. Among the Top 10 (73% weight), almost 40% weightage is from Energy group companies.

Rank Constituent ICB Super sector FTSE IDFC India Infrastructure 30 Index Weight (%)
1 Reliance Communications Ltd. Fixed Line Telecommunications 10.0
2 Bharti Airtel Mobile Telecommunications 10.0
3 Bharat Heavy Electricals Ltd. Electrical Components & Equipment 10.0
4 NTPC Electricity 10.0
5 Larsen & Turbo Industrial Machinery 8.7
6 Suzlon Energy Electricity 5.9
7 Idea Cellular Mobile Telecommunications 5.5
8 Jaiprakash Associates Limited Heavy Construction 4.8
9 Gail India Gas Distribution 4.4
10 Siemens India Electronic Equipment 3.7
Total 73.0

This initiative, in which IDFC has taken a very keen interest and has joined hands with the FTSE of Financial Times, is going to contribute significantly towards greater degree of awareness about the performance of companies engaged in infrastructure sector. This would create higher level of confidence among the investors to invest in the infrastructure sector. The charts that have been mentioned earlier are revealing. While the general perception is that infrastructure is not doing well, the northward movement of stock price of infrastructure companies has been significantly higher in last five years than major companies represented in Nifty 50 and Sensex 30. Energy companies have done even better. This is a fact on which Infrastructure Companies must build and carry conviction with the investors community that it is more attractive to invest in Indian infrastructure sector than perhaps in other sectors. This could prove to be a very effective tool not only for infrastructure companies but also for IDFC and such other agencies which are aiming to help build top class infrastructure in India and at a rapid pace.

In last few years, IDFC has pitched up its activities. If we compare its size of operations in the first year and last year of the 10th Five Year Plan we could appreciate the efforts that are going on.

  1. Sanction for infrastructure projects.

  2. Disbursement.

Years Sanction for infrastructure project ( Rs. in crores) Disbursement (Rs. in crores)
2002 - 2003 2294 930
2004 - 2005 6411 3724
2006 - 2007 13053 7207

Market capitalization has grown in last two years from Rs. 7425 crores in August 2005 to Rs. 17554 crores in July 2007. IDFC is now suitably positioned for a quantum jump both in qualitative and quantitative terms. To encourage the commencement and completion of good infrastructure projects, apart from lending, IDFC should enhance its portfolio on equity support to promoters. This would, infact lead to a win-win situation. While IDFC would enable promoters to mobilize part of their equity requirement which, in turn, will lead to faster financial closure, IDFC could expect a reasonable upside on return, better in most cases than debt instruments could normally provide. This strategy would be equally applicable for many other financing organizations such as PFC, REC etc. IDFC could definitely consider enlarging progressively its equity investments portfolio to about 25 to 30% of total size of its financing. It is indeed satisfying and encouraging that IDFC is moving in the right direction. Its equity portfolio is about 7% now which could be expected to rise sharply.