Infrastructure Debt Fund

The government has finalized the contours of a $10-billion (over Rs. 50,000 crore) infrastructure debt fund (IDF) with 50% participation from a foreign bank and a multilateral agency, while the rest of the corpus will be contributed by state owned financial institutions.

Here are the fundamentals of the concept and details of the latest developments:

What is Infrastructure debt fund?

The Infrastructure debt fund is being set up by the finance ministry in order to channelize long-term funds into infrastructure projects which require long-term stable capital investment. According to the structure laid out by the finance ministry, after consultations with stakeholders, infrastructure NBFCs, market regulators and banks, an IDF could either be set up as a trust or as a company.

IBF as a Trust:

» If the IDF is set up as a trust, it would be a mutual fund, regulated by Sebi or the Securities and Exchange Board of India. The mutual fund would issue rupee-denominated units of five years’ maturity to raise funds for the PPP, or public private partnership projects .

IDF as a Company:

» Company based IDF will be regulated by the RBI. In case the IDF is set up as funds, the credit risk would be borne by investors and not the IDF. As a company, it could be set up by one or more sponsors, including NBFCs, IFCs or banks. It would be allowed lower risk-weightage of 50%, net-owned funds (minimum tier-I equity of ` 150 crore). It would raise resources through issue of either rupee or dollar-denominated bonds of minimum five-year maturity. It would invest in debt securities of only PPP projects, which have a buy out guarantee and have completed at least one year of commercial operation. Refinance by IDF would be up to 85% of the total debt covered by the concession agreement. Senior lenders would retain the remaining 15% for which they could charge a premium from the infrastructure company. The credit risks associated with the underlying projects will be borne by IDF. As an NBFC, the fund would be regulated by the Reserve Bank of India.

India Infrastructure Finance Company (IIFCL), Life Insurance Corporation and IDBI Bank along with Asian Development Bank and HSBC are joining hands to set up a non-banking finance company (NBFC) that will manage the fund. The initial corpus of the fund will be $1 billion (over Rs 5,000 crore) with 50% coming from the three state-run agencies and HSBC and ADB contributing the rest. A request to get ADB to pitch in has been sent to the finance ministry. The day-to-day operations of NBFC will be with HSBC as there was a view that private players were better equipped to handle the fund. While companies have the option to set up a fund in the form of a mutual fund, the government has opted for the NBFC route. IDBI Bank was keen to go for the MF option as IIFCL has the mandate to provide funds for projects set up under the public-private partnership (PPP) route.

The formal announcement about this development is expected to be made in the Budget as the government is keen to announce a series of measures to spur infrastructure development — seen to be the biggest roadblock in recent times. Although the IDF structure was announced in the last Budget, only smaller players have come forward to set up the fund.

Important Points:

  • The initial corpus will be over Rs 5,000 crore
  • 50% will come from the state-run agencies and the rest from HSBC and ADB
  • A formal announcement likely in the Budget
  • Day-to-day operations of NBFC may be with HSBC
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