The Central Government on Friday sought to lay down the broad structure of the ‘Infrastructure Debt Funds', as announced by Finance Minister Pranab Mukherjee in the budget for 2011-12, saying that to raise long-term finances for funding infrastructure projects, the IDFs could be set up both as companies or as trusts.
Aimed at meeting the 12th Plan funding requirement for infrastructure pegged at US$ 1 trillion, Mr. Mukherjee had proposed the IDF mechanism to expedite and enhance the flow of long term debt for funding the country's ambitious programme of infrastructure development
Laying down the broad structure and norms of the funding mechanism, a Finance Ministry statement said: “An IDF may be set up either as a trust or company ... A trust based IDF (Mutual Fund) would be regulated by SEBI; an IDF set up as a company (NBFC) would be regulated by the RBI…” The statement noted that since the IDF mechanism is a novel attempt to address the issue of sourcing of long-term debt, its structure would be reviewed for efficacy and refinement and the competent authority for its approval has cleared both the routes — of company and trust — owing to their distinct advantages.
The IDFs' basic objective would be to garner resources from both domestic and offshore institutional investors, especially insurance and pension funds. Alongside, banks and financial institutions would also be allowed to sponsor IDFs.
Giving details of an IDF in company structure, the statement said that it could be set up by NBFCs or banks with a minimum capital of Rs.150 crore. Such a fund would be permitted to raise resources through rupee or dollar-denominated bonds of minimum five-year maturity. These bonds could be traded among the domestic and foreign investors.
Such company-based IDFs would be allowed to fund projects in the public-private partnership (PPP) mode which have completed one year of commercial operations.
Potential investors in this category would include offshore and domestic institutional investors, high net worth individuals (HNIs) and non-resident Indians (NRIs).
As for trust-based IDFs, the statement 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 SPVs (special purpose vehicles) across all infrastructure sectors.
Minimum investment
The minimum investment by trust-based IDFs would be Rs.1 crore with Rs.10 lakh as minimum size of the unit.
The essential difference between the two routes would be that while the credit risks associated with underlying projects being funded by the trust-based IDFs will be borne by investors and not the IDF, in the case of company-based IDFs, the fund would have to bear the risk.
The Finance Ministry noted that since the IDF would be a pass-through vehicle, it would be easily workable if set up as a trust. On the other hand, however, since a trust cannot issue bonds or undertake credit enhancement and cannot get withholding tax benefits, an IDF would also have to be allowed to be set up as a company.
