BackCurrency risk sharing hits plan for Feeder Fund
As India refuses to bear the risk, it's up to the UK govt, Feeder Fund, Infra Debt Funds to explore risk-sharing formula
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New Delhi: The proposed so-called Feeder Fund, or a fund of funds, to be based in London to attract overseas investments to finance infrastructure projects in India is stuck as a decision is yet to be taken regarding who should bear the currency risk.
While the finance ministry has refused to bear the risk, it is now up to the UK Treasury, Feeder Fund and Infra Debt Funds to decide the manner in which the currency risk will be shared.
The Feeder Fund will be listed on the London Stock Exchange (LSE) and will be a source of long-term financing for Indian Infrastructure Debt Funds (IDFs) by attracting overseas investments, especially from insurance companies and pension funds.
According to the Planning Commission, India requires an investment of about $1 trillion in the 12th five-year Plan (2012-2017), double that in the 11th Plan.
IDFs, first announced by former finance minister Pranab Mukherjee, now India’s President, in his 2011-12 budget speech act as investment vehicles for refinancing the debt of infrastructure firms, thus creating headroom for banks to lend for fresh infrastructure projects.
To provide foreign long-term capital to IDFs, former finance minister P. Chidambaram, during a visit to London in May last year, announced that India was looking at setting up a fund that would attract money from insurance and pension funds in the UK and which would be used to provide long-term financing for IDFs.
“Both countries agreed to pursue joint work on the common aim of exploring ways to encourage increased institutional investment in infrastructure," he said in a joint statement after the 6th annual India-UK economic and financial dialogue. “This will include exploring the possibility of establishment of a London-listed feeder fund for Indian IDFs."
A finance ministry official said on condition of anonymity that while the UK government wanted the Indian government to underwrite the IDFs to be listed on the LSE, New Delhi does not have the headroom to do this.
“We are already underwriting PPP (public private partnership) projects. There is no scope for underwriting IDFs again? Now that IDFs have a one year track-record, they can go of their own to list the Feeder Fund," the official said.
If a PPP project is terminated by the government, 90% of the bank loan is paid by the government as a part of the risk-sharing mechanism with the private developer of the project. India prefers the PPP model that involves the use of private funds and expertise to develop public infrastructure.
An official from one of the IDFs who asked not to be identified said the UK government no longer wants India to bear the currency risk but added that “who will bear the currency risk—the UK government, or IDFs or the Feeder Fund— is yet to be decided".
“Somebody has to bear it or the risk has to be borne equally by all the parties. A solution to the issue is likely to emerge in a month’s time," this person added.
While hedging mitigates the currency risk, doing so currently is a costly proposition because of the recent volatility in the Indian rupee. “The Indian rupee has largely stabilized against the US dollar, but it will take a little more time for hedging costs to come down," the IDF official said.
Since the beginning of this year, the rupee has gained 1.56% against the dollar after slumping 11% in 2013.
Still, the fund is very much on, he added.
“Now that a new, stable government is in place, foreign investors are looking at India positively. So far only short-term foreign capital has come to Indian debt and equity markets. Long term funds will flow into the infrastructure sector once the Feeder Fund is in place," he added.
The government has so far announced four IDFs to be set up by public and private financial institutions.
Chidambaram in February launched the operations of India Infradebt Ltd by handing over the first IDF-non-banking finance company (NBFC) permit. The promoters of Infradebt, led by ICICI Bank Ltd, include Bank of Baroda, Citibank NA and Life Insurance Corp. of India.
Larsen and Toubro Ltd has launched the fourth and the latest IDF through the NBFC route. It has received approval from the Insurance Regulatory and Development Authority (Irda) for issuing bonds to the tune of ₹ 500 crore.
Abhaya Agarwal, a partner at EY, who oversees the infrastructure practice at the consultancy, said in case of a currency depreciation somebody has to take a haircut. “Right now, India is in a sweet spot because there is investor confidence and visibility of good governance and decision making by the new government. Investors may be willing to take risk of four to five years thinking that currency may not depreciate, but not beyond that. It will be a tricky exercise," he added.
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