Infrastructure debt funds are investment vehicles to accelerate the flow of long term debt to the sector.
Domestic/offshore institutional investors, insurance and pension funds can invest through units and bonds issued by the IDFs.
IDF-NBFCs would take over loans extended to infrastructure projects which are created through the Public Private Partnership (PPP) route and have successfully completed one year of commercial production.
Bonds floated by the IDFs can be subscribed to in US dollars or Indian rupees.
Who can Invest?
Risk averse off-shore Institutional Investors, off-shore High Net-worth Individuals (HNIs), Sovereign Wealth Funds, Pension Funds, Insurance Funds, Endowments, Domestic HNIs and Institutional Investors.
How it works?
When investors invest money in a IDF company that company will invest the amount in some infrastructure projects.
Such projects or company will pay interest to IDF company, that interest is passed to you after deducting the fees or commision.
IDF income is exempt from Income Tax. Withholding tax on interest payments on the borrowings by the IDFs has been reduced to 5 per cent from the earlier 20 per cent .
IDF that issues bonds
In case of an Infrastructure Debt Fund that issues bonds, credit enhancement inherent in Public Private Partnership (PPP) projects would be available.
Such IDFs would refinance PPP projects after their construction is completed and they have successfully operated for atleast one year.
Such projects would involve a lower level of risk and consequently a higher credit rating.
Such a structure would enable flow of Insurance and Pensions Funds at competitive costs in order to channelize low cost long term debt in PPP projects in infrastructure sectors such as roads, ports, airports, railways, metro rail etc.
In case of Infrastructure Debt Fund that issue units, greater credit risk would be borne by the investors who will be free to seek correspondingly higher returns. MFs would be especially useful for non PPP projects.
Government is raising funds as present funding is not enough in the long term. Banks are also tied up due to their asset-liability mismatch banks are also approaching their exposure limits.
The IDFs will also push the evolution of a secondary market for bonds which is presently lacking in sufficient depth.
Infrastructure Debt Fund would enable sourcing of funds through alternate sources which would help in bridging the likely debt gap which government is unable to fill it.