THE SENIOR ANALYST
In its attempt to provide multiple instruments
to the private sector to raise funds, Government
has come up with many innovative products. Of
these, three financial products namely
Infrastructure Debt Funds (IDFs), Takeout
Financing and Credit Enhancement Mechanism
have been in the news lately and are deemed to
fill the financial gap in the infrastructure sector.
The underlying idea behind all of them is to urge
participation of insurance funds and pension
funds in providing cost-effective infra funding,
while off-loading the Bank’s Balance sheets and
saving them from the so called asset – liability
mismatch.
A. Infrastructure Debt Funds (IDFs):
IDFs are investment vehicles which can be
sponsored by commercial banks and NBFCs in
India in which domestic/offshore institutional
investors, specially insurance and pension funds
can invest through units and bonds issued by the
IDFs. IDFs would essentially act as vehicles for
refinancing existing debt of infrastructure
companies, thereby creating fresh headroom for
banks to lend to fresh infrastructure projects.
Infrastructure Debt Funds (IDFs), can be set up
either as a Trust or as a Company. A trust based
IDF would normally be a Mutual Fund (MF),
regulated by SEBI, while a company based IDF
would normally be a NBFC regulated by the
Reserve Bank.
Jan 2014
with its deposits (liabilities) lasting for around 3
to 5 years do not have a risk appetite for lending
funds (assets) for such long periods of around 20
years.
•Inclusion of Insurance and Pension Funds in
infrastructure: Unlike banks, insurance and
pension funds have deposits for long durations.
Leveraging these funds will bring more options in
the sector and more importantly greatly reduce
the cost of funds in infrastructure by balancing
the assets and liabilities.
Structure of IDFs:
As stated earlier IDFs can be generated through
two routes, both of which are briefly discussed as
follows:
1)IDF through Mutual Fund: A Mutual Fund style
IDF effectively allows investors to pool their
resources across a range of infrastructure assets
in order to reduce their risk. Investments can be
made in any kind of infrastructure project – from
early stage through to late stage – and may be
income tax exempt for participating sponsors.
IDF-MFs can be sponsored by banks and NBFCs
and comes under the ambit of SEBI.
2)IDF through NBFC:
Need for IDFs:
•Asset Liability mismatch in Banks: To appreciate
the need for IDF, it is important to understand
the project cycle of infrastructure projects. What
differentiate Infra from other sectors are long
gestation periods, to the tune of 20-25 years, for
which the projects require sustainable and low
cost long-term financing. To date, debt financing
has largely been led by the banking sector which
– with significant assets already on the books – is
fast approaching their debt limits. Now a bank
The second planned structure would see the
creation of a non-bank finance company (NBFC)
that is effectively restricted to investing in PPP
projects that have passed the one-year
commercial operations date and can therefore
offer a very focused investment outlook. Such
take-over of loans from banks would be covered
by a Tripartite Agreement between the IDF,
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