The data centre space has experienced incredible growth, fuelled by digital governance, data localisation and 5G. The Government of India has taken significant steps in this regard such as the draft National Data Centre Policy, granting “infrastructure” status. Further, several states have formulated their respective data centre policies to promote investment in the sector. While fiscal initiatives might seem appealing in the short term, there are concerns about their long-term viability, especially when distribution companies are already struggling. Non-fiscal initiatives, in contrast, have proven to be successful. For example, single-window clearances and dual-grid electricity connection significantly help data centres.
Investment opportunity
Foreign direct investment (FDI) in the sector is permitted up to 100 per cent through the automatic route. Financing opportunities for data centres were further expanded in 2022 with data centres having an IT load of 5 MW or more being included in the list of infrastructure sub-sectors. This has enabled foreign venture capital investment (FVCI) in data centres meeting the IT load threshold. FVCIs are required to register and comply with the Securities and Exchange Board of India FVCI Regulations, 2000. This is a separate foreign investment route that is limited to specific sectors, including the infrastructure sector. Institutional investors have shown a lot of interest, with FVCI now being seen as an investment vehicle in India.
In the long run, infrastructure investment trusts (InvITs), which include data centre assets, may become viable. InvITs would provide a platform to aggregate data centre assets and access the public securities market to drive the investment in the sector. However, they come with their limitations, as there is a minimum asset size of Rs 5 billion. Also, only 10 per cent of the value of InvIT assets may be invested in under-construction projects. However, with FDI policies and other initiatives, India is moving in the right direction for investments.
Key regulatory matters
Unlike certain other infrastructure sub-sectors, this sector faces an intersection of critical core regulatory issues beyond just the availability of land for data centres. There are several other regulatory matters that are equally important in the value chain, such as power, industrial classification and telecom infrastructure. Each of these factors needs to be considered.
One of the key issues is power. Typically, to structure a data centre as a captive power consumer, the developer can invest in a captive power generation unit. However, the issue remains for data centres where the data centre consumer, distinct from the developer, is the actual end user of the power and hence, discoms may refuse to recognise such consumption as captive consumption. This may result in a loss of benefits such as additional surcharge and cross-subsidy surcharge. There is a need for better clarity on the monetisation of captive power. Along similar lines, green power is also a concern. However, the notification of the Green Energy Open Access Rules has simplified the system with the establishment of a single model agency, that is, Grid Controller of India Limited. Further, to cater to investors’ aspirations for carbon neutrality, green energy needs to be incentivised.
Further, there is no is no clarity the national industrial classification code with respect to data centres. Such clarity is essential to monitor and incentivise foreign investments in the future.
In relation to land and buildings, a separate classification is needed in the National Building Code for data centres, as they cannot be categorised as commercial buildings due to their unique design and construction requirements.
Finally, access to telecom infrastructure also needs attention. Some gaps need to be filled, such as the fact that there is no direct access to certain passive infrastructure, such as dark fibre, for cloud service providers. Therefore, action is needed, either through liberalisation or a balanced approach, to solve these regulatory matters.
Comparative analysis of states
As noted above, various states have formulated their own data centre policies. A snapshot of the nature of incentives offered under such policies can be garnered by an examination of the policies formulated by Karnataka, Tamil Nadu and Uttar Pradesh, which have formulated some of the most comprehensive state policies. Interestingly, these states have streamlined, single-window clearance portals for business approvals, increasing the ease of doing business. These states have further provided relaxation from certain regulatory requirements such as permitting self-certification under various labour legislations and limited exemption from conforming to the national building code in the construction of data centres.
The way forward
Green is the new mantra, and green data centres will be the future in India. The Government of India is putting in a lot of effort, but certain requirements need to be met. Standardisation and a centralised approach are necessary to bring about consistency and uniformity in the system. Additionally, the promotion and incentivisation of data centre parks is needed, with a greater focus on Tier II cities.
Based on a presentation by Rachita R. Bhat, Partner, S&R Associates
