India finalises structure of infrastructure debt funds

India finalised the structure of infrastructure debt funds, an instrument it wants to use to source long-term debt to finance the country's infrastructure needs, saying they could be set up as companies or trusts, according to a finance ministry statement.                                           

India plans to invest $1 trillion from next year to 2017 to expand its clogged road and rail network, build more power plants and ports, so it can overhaul its creaking infrastructure, long seen as hobbling faster growth in Asia's third-largest economy.

The federal finance minister had in his budget speech for fiscal year 2011-12 announced the setting up of infrastructure debt funds (IDFs) to source long-term debt from both foreign and domestic investors, and also eased taxation rules to make IDFs more attractive to off-shore funds.                                            

If an IDF was set up as a trust, it would issue rupee denominated units which will mature in five years and will have to invest at least 90 % of its investible resources in debt securities of infrastructure projects, the finance ministry statement said on Friday. Such IDFs would be regulated by the capital markets regulator, the Securities and Exchange Board of India. They could also be set up as companies, in which case they would be regulated by the Indian central bank and could raise resources through rupee- or dollar-denominated bonds with a minimum maturity of five years.                                           

Non banking financial companies, infrastructure finance companies and banks can set up an IDF as a company. "The structure of IDFs would be closely reviewed for its efficacy and further refinement," the statement said.                                           

Indian commercial banks face difficulties in lending to infrastructure projects that have long payback periods as the banks mostly lend short-term funds, which creates an asset liability mismatch. Most banks are also nearing the maximum limit that they can lend to the infrastructure sector, the statement added. IDFs will take over these exposures and commercial banks are then free to lend money to other infrastructure projects and deploy their funds in other productive avenues of the economy.                                           

IDFs will also help tap long-term resources through pension and insurance funds and, thereby, help create a deeper secondary market for long-term paper, which is lacking sufficient depth, it said.                                           

"IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of savings like insurance and pension funds which have hitherto played a comparatively limited role in financing infrastructure," the statement added.