Mumbai: State-run Life Insurance Corporation of India (LIC) will come in as the largest investor in the government’s proposed 40,000 crore National Investment and Infrastructure Fund (NIIF), said two people familiar with the plan.

The NIIF, a quasi-sovereign fund that aims to finance infrastructure growth, has been in the works since March 2015. The government said it would invest half the corpus ( 20,000 crore) and seek participation from domestic and global long-term investors such as sovereign wealth funds and pension funds to raise the rest.

In a letter sent a few days back, the government has asked LIC to contribute 10% of the investment corpus and become an equity partner in the company that will run the fund.

“LIC can take a 15% stake in NIIF. Once the fund is created after the government’s initial contribution, LIC can invest up to 10% in the overall corpus of the fund," said one of two people, both of whom spoke on condition of anonymity because the plan isn’t public knowledge yet.

This would mean an initial contribution of 4,000 crore by LIC.

The government will hold a 49% stake in the fund, while the remaining 51% stake will be held by large domestic and foreign institutional investors and government-owned investment bodies that will be called partners in the fund.

“The government may decide on total equity capital infusion of 100-500 crore as the firm commitment to create and run the fund. The value of a 15% stake by LIC, as proposed, will depend on the commitment. The value of the rest 10% investment contribution will vary in absolute terms according to the corpus of the fund year after year," said the second person.

With assets to the tune of at least 20 trillion, LIC is the country’s largest state-run life insurer as well as the biggest investor.

LIC did not respond to an email sent on Wednesday seeking comment.

NIIF was registered with the Securities and Exchange Board of India as a category II alternative investment fund (AIF) on 28 December. The fund will be managed and controlled by National Investment and Infrastructure Fund Trustee Ltd.

According to the second person, the NIIF is expected to be fully operational within a year or so.

“Apart from LIC, there are other large foreign institutions, sovereign wealth funds, pension funds, provident funds, welfare trusts and other government-owned bodies and trusts which have shown interest for equity participation in NIIF and to contribute as anchor investors," said the second person.

“This will be a category II AIF which is eligible for a tax pass-through treatment. So there is a lot of interest among large investors globally in this fund. The government is examining all the applications and their proposals," the person added.

According to the government’s plan, the operations of NIIF will be supervised by a governing council headed by the finance minister. At present, there are five members in the council, including the secretary, department of economic affairs; secretary, department of financial services; Arundhati Bhattacharya, chairman of State Bank of India; Hemendra Kothari, an investment banker; and V. Mohandas Pai, chairman of Manipal Global Education.

India Infrastructure Finance Co. Ltd has been appointed as the investment advisor to NIIF for a six-month period and IDBI Capital Market Services has been selected as advisor to the NIIF trustees for one year.

On 4 February, Shaktikanta Das, secretary, department economic affairs, said the finance ministry had received at least 70 applications for the post of chief executive officer of NIIF.

According to Vinayak Chatterjee, chairman of consulting firm Feedback Ventures, the participation of pension funds, provident funds and insurance companies is necessary to attract other investors.

“LIC’s participation is necessary and the right way to set up such a fund and make it work. Having an insurance company such as LIC or long-term funds such as EPFO as investors in NIIF will not only build the right confidence among investors but also ensure smooth funding in the long run, which is essential in infrastructure projects," said Chatterjee.

EPFO is the Employees’ Provident Fund Organisation, the state-run retirement fund manager.

Additionally, “a fund like NIIF may also help (in) reducing the burden of non-performing assets for banks since a large chunk of bad loans often arise from exposure to real estate and infrastructure companies", he added.

Banks have gone slow in funding infrastructure projects in the last couple of years as bad loans ballooned due to an economic slowdown and delays in project execution. According to the Reserve Bank of India’s December 2015 financial stability report, five sectors had an outsized contribution to bad loans.

The mining, iron and steel, textiles, infrastructure and aviation sectors, which together constituted 24.2% of the total advances of banks as of June 2015, contributed 53% of the total stressed advances.

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