FIIs have been allowed to invest in unlisted bonds with a minimum lock-in period of three years in infrastructure companies that are organized in the form of special purpose vehicles
New Delhi/Mumbai: To attract money to finance infrastructure projects in India, Budget 2011 has suggested creating special infrastructure debt funds and significantly raising the limit on overseas investment in infrastructure-related corporate bonds.
The sheer volume of the new limits may bring in serious debt investors into India with long-term plans instead of so-called hot-money flow, experts said.
The infrastructure sector has been allocated Rs2.14 trillion for 2011-12, a 23.3% increase over the current fiscal year and amounts to 48.5% of the gross budgetary support to plan expenditure. Allocation for the energy sector also saw a 23% increase to Rs1,55,495 crore in the coming fiscal compared with the current year.
Also See Proposals for Growth (PDF)
Mint reported on 27 July about the creation of Rs50,000-crore debt fund to raise low-cost, long-term resources to re-finance power projects.
Projected investment required for infrastructure development during the 12th Plan period (2012-17) is Rs40.99 trillion. Half of this is expected to come from the private sector.
Finance minister Pranab Mukherjee, while giving a tax exemption to the proposed debt fund, also reduced the interest payment of the borrowings of these funds by slashing the withholding tax rate to 5% as compared with the current rate of 20% and reduced the tax on dividends received by an Indian company from its overseas subsidiary to 15% to attract investments.
Withholding tax is charged on the repatriation of income from equity or debt.
The budget increased “the FII (Foreign Institutional Investor) limit for investment in corporate bonds, with residual maturity of over five years....by an additional limit of $20 billion, taking the limit to $25 billion”. This in turn will increase the total limit of FIIs to $40 billion for investment in corporate bonds.
FIIs have also been allowed to invest in unlisted bonds with a minimum lock-in period of three years in infrastructure companies that are organized in the form of special purpose vehicles (SPVs). They will be allowed to trade the bonds among themselves during the lock-in period.
“The slashing of withholding tax is a big positive,” said Jayesh Mehta, country treasurer at Bank of America-Merryl Lynch. “Also, the sheer scale of the limit will ensure serious FIIs can sit and figure out their investment plan in India.”
The new limits could also see a different kind of investors in the Indian market, even as the existing limit of $5 billion is yet to be extinguished as yield-chasing FIIs prefer bonds maturing in 1-2 years.
“The fact that they have put these restrictions show that the government wants real money fund as against hot money,” said Ananth Narayan G., regional head, fixed income, currencies and commodities, South Asia, Standard Chartered.
The Budget also saw the India Infrastructure Finance Co. Ltd (IIFCL) getting additional financing of Rs5,000 crore for their takeout financing scheme. In takeout financing, a long-term financing institution agrees to take an existing loan off the books of a bank for a price. This helps banks in financing long-term projects when their resources are short- or medium-term.
Traditionally, take-out financing has not been popular with banks. However, according to IIFCL chairman S.K. Goel, banks will have to avail take-out finance because they are close to reaching their sectoral cap on infrastructure.
“As the industry matures and projects gets awarded, the challenge for them is to get debt refinanced to bring down project cost,” said Shubhranshu Patnaik, senior director, energy and resources, Deloitte India. “He (Mukherjee) has liberalized refinancing side and this is the right way to go about it.”
To attract FIIs in infrastructure bonds over five years, Indian funds will have to offer at least 1-2% extra against similar-maturity bonds, Goel said.
“We will have to offer them Libor plus 3-3.5% for such bonds against the present Libor plus 1-1.5% being offered now,” he said.
To accelerate development in sectors such as railways, ports, housing and highways, the budget has allowed tax free bonds of Rs30,000 crore to be issued by state-owned institutions such as Indian Railway Finance Corp. (Rs10,000 crore), National Highway Authority of India (Rs10,000 crore), Housing and Urban Development Corp. Ltd (Rs5,000 crore) and ports (Rs5,000 crore).
The finance minister also extended the additional deduction of Rs20,000 for investment in long-term infrastructure bonds by one more year and raised the corpus of Rural Infrastructure Development Fund to Rs18,000 crore.
In another development, the finance minister extended a tax holiday on power projects. The tax break under section 80-IA of the Income-tax Act, which ends on 31 March, has been extended by a year.
However, it has denied the seven-year tax holiday to the blocks that are to be offered under the ninth round of the New Exploration Licensing Policy (Nelp), which may see muted response for the bids.
There have been concerns that the response of international oil companies to the ninth Nelp auction may be lukewarm although domestic heavyweights such as Reliance Industries Ltd and Oil and Natural Gas Corp. Ltd are expected to compete alongside smaller entities.