India's Infrastructure Debt Fund

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