India's Infrastructure Debt Fund
The RBI has given its permission to banks
and non-banking financial companies NBFCs for setting up infrastructure debt
funds in the form of NBFCs or mutual funds on September 23, 2011. This comes at
a time when the Planning Commission has projected a huge investment requirement
of the order of about $1 trillion in the Twelfth Plan (2012-17) for
infrastructure projects.
SEBI also recently formulated a draft
chapter VI-B, which on insertion in the existing Mutual Fund Regulations shall
permit setting up of IDFs on this route by registered MFs as a scheme. The
Board of SEBI said that they will announce the scheme separately after due
process.
An IDF may be set up either as a trust or
as a company. A trust based IDF would be a mutual fund that would issue units
while a company based IDF would be a non-banking finance company (NBFC) that
would issue bonds.
The investors would primarily be domestic
and off-shore institutional investors, especially Insurance and Pension Funds
who have long term resources. Banks and FIs would only be allowed to invest as
sponsors of an IDF.
IDF floated as MF
1. Banks acting as sponsors to
IDF-MFs would be subject to existing prudential limits including limits on
investments in financial services companies and limits on CME.
2. NBFC acting as sponsors to
IDF-MF, they will be required to have minimum net owned funds (NOF) of Rs 300
crore, CRAR of 15 % ; and net NPA of less than 3.0% of net advances. Further,
NBFCs should have been in existence for at least 5 years; earning profits for
the last three years and their performance should be satisfactory.
IDF floated as NBFC
Sponsors (Banks and NBFC-IFC) will have to
contribute a minimum equity of 30.0 % and a maximum equity of 49.0% in
IDF-NBFC.
1. Banks
acting as sponsor to IDF-NBFCs would be subject to existing prudential
limits including limits on investments in financial services companies and
limits on CME .
2. NBFC
acting as sponsor to IDF-NBFC Post investment in the IDF, the sponsor must
maintain minimum CRAR and NOF prescribed for IFCs.
3. Criteria
for IDF-NBFC
i) The IDF must have NOF of Rs. 300 crore
or above;
ii) The IDF should be assigned a minimum
credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent
rating by any other accredited rating agencies;
iii) Tier II capital cannot exceed Tier I.
Minimum CRAR should be 15% of risk weighted assets;
iv) The IDF shall invest only in PPP and
post COD infrastructure projects which have completed at least one year of
satisfactory commercial operation and are a party to a Tripartite Agreement
with the concessionaire and the Project Authority for ensuring a
compulsory buyout with termination payment;
v) For the purpose of computing capital
adequacy of the IDF, bonds covering PPP and post COD projects in existence over
a year of commercial operation shall be assigned a risk weight of 50%
The maximum exposure that an IDF can take
to a borrower or a group of borrowers will be at 50% of its total capital
funds. Additional exposure up to 10%would be allowed at the discretion of the
Board of the IDF-NBFC.
Post-investment in the IDF-MF, the CRAR of
the NBFC should not be less than that prescribed and it should continue to
maintain the required level of NOF.
Positives and negatives of IDF NBFC
Positives:
1. The NBFC structure may issue bonds in both Rupee and foreign currencies
thus have less risk as compared to Mutual fund structure which can issue only
Rupee denominated units
2. This may help
banks reduce dependence on takeout financing agencies and will take off the
burden from the banks which are nearing their exposure limits to various
sectors and companies
3. 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.
Negatives:
1. IDF NBFC can invest only
in PPP and post COD infrastructure projects which have completed at least one
year of satisfactory commercial operation; this would make a large number of
projects that are under moratorium and pure private projects ineligible for
lending.
2. Most power
projects that take five years and more to complete may not be eligible for funding by
IDFs.
IDF is surely an innovative way to bring
new sources of both domestic and international investment into the marketplace
and will help to close the growing funding gap
