New Delhi: The government on Friday unveiled the structure of infrastructure debt funds (IDFs), allowing local infrastructure developers access to money from insurance and pension funds from India and overseas, even as bank lending to roads and power projects is constrained by limits set by the central bank.
IDFs, which were announced by Union finance minister Pranab Mukherjee in February, are expected to provide long-term, low-cost debt for infrastructure projects. At present, banks are the main source of funding for these projects. Asset-liability mismatches and loan exposure limits to industries set by the Reserve Bank of India (RBI) have made it difficult for banks to provide long-term funding.
India’s Planning Commission has projected an investment of $1 trillion (nearly Rs45 trillion) for infrastructure development during the 12th Plan (2012-17).
An IDF can be set up either as a trust regulated by capital market regulator Securities and Exchange Board of India or as a company regulated by RBI.
“A trust-based IDF would normally be a mutual fund that would issue units, while a company-based IDF would normally be a form of NBFC (non-banking financial company) that would issue bonds,” the finance ministry said in a statement.
The IDF set up as an NBFC will mainly lend to public-private partnership (PPP) projects, whereas an IDF through the trust route will take care of the funding requirements of non-PPP projects such as those in the power sector, according to government officials, who declined to be named.
While the credit risk associated with the infrastructure project will be borne by the company if the IDF is set up as an NBFC, the risk will have to be borne by the investors if the IDF is set up as a trust.
The government plans to allow IDFs set up as NBFCs to sell bonds to refinance PPP projects after construction is complete and a project has been in operation for a year. This will help PPP projects attract long-term funds at lower costs because of lower risks. Normally, PPP infrastructure projects have very high risks associated with them. Once construction is complete, the risks are lowered and the credit rating of the project improves.
If the bank loans are refinanced by an IDF, a large amount of the existing bank debt will be released, which can be used for lending to new infrastructure projects.
“The guidelines are mainly aimed at helping in refinancing of existing projects and not aid in financing of new projects,” said Jayesh Mehta, managing director and country treasurer (global markets group) at Bank of America Corp. “India needs to take steps to bring risk appetite back—both project risk as well as tenure risk.”
Mint had reported on 27 July about the creation of a Rs50,000 crore debt fund to raise low-cost, long-term resources to refinance power projects.
In this year’s budget, Mukherjee had also announced tax breaks, including a reduction in withholding tax on interest payments on the borrowings by IDFs to 5% from 20%, and exempted the income of IDFs from income tax. Withholding tax is charged on repatriation of income from equity or debt.
Foreign investors, however, will be able to avail the lower withholding tax benefit only if they invest in bonds of NBFCs.
Bankers say long-term investors such as offshore insurance and pension funds will prefer to invest through the NBFC route as it will give them tax benefits and lower their risk.
“Prima facie it looks like that foreign investors will benefit only if they invest through the NBFC route as they can only avail the withholding tax benefit then,” said Mehta.
An IDF set up as a company will be given certain relaxations in terms of risk weightage, net-owned funds and exposure norms. It could be set up by either NBFCs, financial institutions or banks. It will be allowed to raise funds through both rupee- or dollar-denominated bonds of minimum five-year maturity.
RBI will later issue detailed guidelines for setting up of IDFs as an NBFC.
An IDF set up as a trust could be sponsored by any domestic entity that is regulated by a financial sector regulator. The IDF will be allowed to raise funds through the issue of rupee-denominated units of a minimum maturity of five years. The fund will also have to invest at least 90% of its assets in debt instruments sold by infrastructure companies.
The investors in an IDF will primarily be domestic and foreign institutional investors. Banks and financial institutions can only act as sponsors of an IDF.
Utpal Bhaskar contributed to this story.