Infrastructure Debt Fund

India has emerged as one of the fastest growing economies during the past decade. However, infrastructure development has not kept pace with the growth in the rest of the economy. Realizing this, India initiated an ambitious reform programme in all infrastructure sectors. The Government has taken several initiatives to promote private sector participation in the infrastructure sector as a result of which the share of GDP going into infrastructure investment has increased from 5% in 2007 to 7% during 2009-10 and has increased to more than 8% in 2011-12. For the XII Five Year Plan (2012-2017), the target of infrastructure investment has again been doubled to US $ 1 trillion 50% of which is envisaged from the private sector.

The Ministry of Finance has taken several initiatives to promote the flow of long term funds in infrastructure sector (both domestic and off-shore funds) like setting up of the Infrastructure Debt Fund (IDF), raising the FII limits and liberalizing the ECB regime in order to facilitate off shore fund flows to infrastructure.

The Finance Minister in his Budget speech for 2011-12 had announced setting up of Infrastructure Debt Funds (IDFs) to accelerate and enhance the flow of long term debt in infrastructure projects. To attract off-shore funds into IDFs, it was decided to reduce withholding tax on interest payments on the borrowings by the IDFs from 20% to 5%.

Wide-scale consultations with stakeholders were undertaken . Ministry of Finance issued the guidelines for the IDFs that inter alia allowed IDFs to be set up as NBFCs or as mutual funds in June, 2011. Regulations governing IDFs structured as mutual funds was issued by SEBI in August, 2011 and regulations governing IDFs structured as NBFCs was issued by RBI in November, 2011.

The IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of long tenure savings like Insurance and Pension Funds which have hitherto played a comparatively limited role in financing infrastructure in India. Further, the IDFs set up as NBFC shall invest only in PPP projects which have successfully completed one year of commercial operation and are a party to a Tripartite Agreement with the concessionaire and the Government authority sanctioning the project. Banks and NBFCs would be eligible to sponsor IDFs subject to existing prudential limits. The restricted portfolio of investment of the IDF, tripartite agreement and first loss of the sponsors would enable the IDFs to issue bonds with at least AA rating. Thus the IDFs would present an attractive option for such entities who wish to invest for long term in comparatively secure instruments. The off-shore investors that these IDFs are targeted to tap are Pension Funds, Insurance Companies, Sovereign Wealth Funds, Endowment Funds etc.

So far 3 IDFs have already been launched. The first IDF structured as a NBFC was launched on March 5, 2012, with ICICI Bank, Bank of Baroda (BoB), Citicorp Finance India Limited (Citi) and Life Insurance Corporation of India (LIC) entering into a Memorandum of Understanding (MoU). The initial size of this IDF is expected to be Rs. 8,000 crore.

IDBI along with a consortium of public sector banks has also launched an IDF structured as a NBFC with an initial equity of Rs. 1000 crore which enables it to raise funds upto Rs. 26,000 crore.

IDFC has launched an IDF structured as a mutual fund. Three more funds are awaiting regulatory approval.

Courtesy: PIB