Norms for Infrastructure Debt Funds cleared

The Indian government may set-up Infrastructure Debt Fund (IDF) to accelerate and increase the flow of long term finance in infrastructure sector, the proposed IDF may be a company or a trust. In this year’s budget, Finance Minister has proposed to set Infrastructure Debt Fund to accelerate and enhance the flow of long term debt for funding the ambitious programme of infrastructure development in the country. In the 12th Five Year Plan Indian government is planning to invest $1 trillion to improve and develop the infrastructure in the county.
 
In a statement issued by the Finance Ministry, An IDF may be set up either as a Trust or as a company. A trust based IDF would normally be a Mutual Fund (MF) that would issue units while a company based IDF would normally be a form of NBFC that would issue bonds. An IDF would have to be registered in India and regulated by one of the financial regulators. A trust based IDF (MF) would be regulated by SEBI; and an IDF set up as a company (NBFC) would be regulated by RBI. The RBI will issue regulation for setting up of IDFs on the company route.

For finalizing the structure of the proposed IDF, Finance Ministry had long consultation with the potential investors, infra companies and regulators and experts. The finance ministry said in the statement, IDF is a novel attempt to address the issue of sourcing long term debt for infrastructure projects. The IDF would try to gather resources from domestic and off-shore institutional investors, mainly Insurance and Pension Funds, Banks and Financial Institutions would be allowed to invest as sponsors of an IDF.

As per the official statement, company based IDFs would be allowed to finance public-private partnership (PPP) which have completed one year of commercial operation. The finance ministry said, such a structure would enable flow of Insurance and Pensions Funds at competitive costs in order to channelize low cost long term debt in PPP projects in infrastructure sectors such as roads, ports, airports, railways, metro rail etc.

On the structure of IDF as a company, the finance ministry’s release said it could be set up by one or more sponsors, including NBFCs, IFCs or banks, with a minimum capital of Rs 150 crore, the funds would be allowed to raise resources through rupee or dollar denominated bonds of minimum five years maturity. These bonds could be traded among the domestic and foreign investors. The credit risk associated with the underlying project will be borne by the IDF.

On the structure of trust based IDFs, the finance ministry said the fund could be sponsored by a regulated financial sector domestic entity. It would have to invest 90 per cent of its assets in the debt securities of infrastructure companies or special purpose vehicles (SPVs) across all infrastructure sectors. Minimum investment by trust-based IDF would be Rs 1 crore with Rs 10 lakh as minimum size of the unit. The credit risks associated with underlying projects will be borne by the investors and not by IDF.

“The IDFs will also help accelerate the evolution of a secondary market for bonds which is presently lacking in sufficient depth. Thus, the IDFs would enable sourcing of funds through alternate sources which would help in bridging the likely debt gap” Finance Ministry said.