A committee set up by the Securities and Exchange Board of India (Sebi) will submit its report by the month-end setting out recommendations for a policy roadmap to allow infrastructure mutual funds (MFs) to invest in equity and debt of unlisted companies and projects.
Unlike investments in listed companies, the valuation of stakes in unlisted companies is prone to disputes. To protect retail investors who will invest in these infrastructure MFs, the committee is also working on safeguards.
The committee was set up after a directive by finance minister P. Chidambaram, in an effort to allow retail investors to benefit from the infrastructure growth story, said U.K. Sinha, committee chairman and chairman of UTI Asset Management Co. Pvt Ltd.
“The effort is part of a larger policy objective to enable participation at the growth stage rather than after an initial public offer, as well as channelize resources for the industry,” Sinha said. He declined to divulge what safeguards the committee has envisaged to protect retail investors in the absence of valuations decided by the market or provide any other details.
The committee will submit its report to Sebi. If Sebi approves the proposals, one of the issues that will come up is the calculation of net asset value (NAV) of the funds. The panel is expected to address the issue, but Sebi will have to then issue new guidelines.
Allowing investments in unlisted companies would also help raise money in a highly capital-intensive industry, analysts said, although it wouldn’t address the sector’s need for long-term funding.
Currently, MFs aren’t allowed to fully invest in unlisted companies. For infrastructure funds, the government has mandated that a fund manager may invest up to 15% of the corpus on unlisted companies.
There are four dedicated infrastructure funds now, including SBI Mutual. Its parent intends to launch a $1 billion (around Rs4,040 crore) fund. The MF industry in India has assets under management of $35 billion.
While the infrastructure sector is booming, retail investors don’t get a chance to participate and profit at the growth stage of many companies, owing to current restrictions on fund managers.
Industry officials, however said that while any capital inflow into infrastructure companies would be welcome, both listed and unlisted, the recommendations, even if accepted by the finance ministry, would not do much to alleviate a shortage in long-term debt and equity capital for the infrastructure sector.
“Most debt and equity funding in India is in the seven-eight year range, while the industry runs in 30-year cycles,” said Vinayak Chatterjee, chairman of project management company Feedback Ventures Pvt. Ltd. He also heads the national committee on infrastructure for trade body Confederation of Indian Industry.
Infrastructure is one area “where there is a lot of interest”, said Syed Shahabuddin, managing director and chief executive officer of SBI Funds Management Pvt. Ltd. “We have to spend in the next five years, what we did in the last 50 years. The funds that have been mobilized so far are a small fraction of what is required,” he added.
Shahabuddin, however, said that even if the enabling legislation was passed, the company wouldn’t launch a product looking to invest in unlisted infrastructure companies for the short term. “We have to develop the expertise, but we are bringing people on board, who will bring the expertise.”