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March 4, 2013Infrastructure Debt Funds
Infrastructure Debt Funds (IDFs) are supposed to be set up in the Indian economy to accelerate and enhance the flow of long term debt in infrastructure projects. This fund is supposed to be used for the funding of the highly ambitious government’s program of infrastructure development.
In order to attract off-shore funds into IDFs:
i) Withholding tax on interest payments on the borrowings by the IDFs would be reduced from 20% to 5%
ii) Income of the IDFs has also been exempt from income tax. Thus it gave IDF the stature of being one of the best investment instruments.
Read more about Major Infrastructure Companies in India.
Following broad structure has emerged based on these consultations:
- 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
- A company based IDF would normally be a form of NBFC that would issue bonds
- It is mandatory that for its operation in India, an IDF would have to be registered in India. Also it needs to be regulated by one of the financial regulators like SEBI, RBI, etc.
- A trust based IDF (MF) would be regulated by SEBI
- IDF set up as a company (NBFC) would be regulated by RBI
- The investors would primarily be domestic and off-shore institutional investors
- Banks and FIs would only be allowed to invest as sponsors of an IDF.
Risk
- In case of an IDF that issues bonds, credit enhancement inherent in Public Private Partnership (PPP) projects would be available. This would help in re-financing the PPP projects which are completed and have operated for a period of over 1 year. Being complete in construction and having operated for a period of 1 year, these IDFs would involve low risk and consequently a higher credit rating.
- For IDFs issuing units, greater credit risk would be borne by the investors who will be free to seek correspondingly higher returns. MFs would be especially useful for non PPP projects.
It is well known that the Infrastructure projects have long pay-back period and thus require long-term financing in order to be sustainable and cost effective. Long term financing was becoming a constraint for the banks as they were unable to provide the funding due to the asset-liability mismatch. Also the banks are approaching their exposure limits. Thus in this situation IDF is something which would come handy. IDFs through innovative means of credit enhancement, are expected to provide long-term low-cost debt for infrastructure projects. IDFs would achieve the same by tapping the enormous amount of fund lying with the savings like Insurance and Pension Funds.
Read about Infrastructure Finance Companies in India.
IDFs are expected to take over large volume of loans disbursed by the banks for the infrastructure projects. This will be achieved by the method of refinancing bank loans of existing projects. As a result of which an equivalent volume for fresh lending to infrastructure projects will also be released.
Conclusion
Thus we can say that the IDFs are helping the major financial institutions of India like the banks, pension houses, insurances companies. Also IDFs will help in accelerating the evolution of a secondary market for bonds which is presently lacking in sufficient depth. IDFs is the need of the current generation which will boost the development of the infrastructure for the Indian economy. This would help in enhancing the rate of growth for the economy. IDFs would also enable the sourcing of funds through alternate sources which would help in bridging the debt gap and would give the whole economy a different picture altogether.