What Are Infrastructure Debt Funds? Who Can Set Up IDFs?

Classroom

oi-Sunil Fernandes

By Sunil Fernandes

Published: Monday, August 8, 2016, 9:12 [IST]

The government is increasingly laying a thrust on infrastructure. In fact, in the last Union Budget, we saw heavy allocations to infrastructure with an emphasis on roads, bridges, ports etc.

One of the right vehicles for funding such infrastructure projects in the country would be Infrastructure Development Funds also called IDFs.

What are Infrastructure Debt Funds?

Infrastructure debts funds can be established by commercial banks in the country, by mutual funds and large insurance companies.

In fact, they can also be set-up by offshore institutional investors as well. In short, a host of large players have been allowed to act as Infrastructure Development Funds. They are basically investment vehicles that would fund infrastructure projects in the country.

Such promoters or sponsors could look at various avenues for investment and could even refinance the large debts that infrastructure companies already owe to lenders. They could adopt a host of routes while investing including the equity and the debt route for funding large projects.

Can NBFCs set-up Infrastructure Debt Funds?

Yes, Non Banking Finance Companies or NBFCs are permitted to set-up infrastructure debt funds in the country. However, they have to fulfill certain criteria for the purpose. Such a company that plans to set up IDFs should have new owned funds of a minimum of at least Rs 300 crores. Such a NBFC planning to set-up IDFs should not have non performing assets or NPAs of more than 3 per cent.

Moreover, it should be earning profits for the last three years and such an NBFC cannot be less than five years old.

Whose permission is needed to set-up Infrastructure Debt Funds?

Permission would be needed from the Reserve Bank of India for such companies who plan to set-up IDFs.

However, all equity/debt and other norms would largely need to be in compliance with the para 18 of the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007.

Other norms for NBFC Infrastructure Debt Funds?

No NBFC can fund a single project of more than 50 per cent of its net owned funds. This is restricted to only a single project.

If additional exposure is needed, there would be a permission that is needed from the Reserve Bank of India. However, the RBI may allow a further exposure of 15 per cent and not beyond that.

How can mutual funds and NBFCs raise resources for funding IDFs?

There are various routes through which these institutions can raise resources. They can raise money through both dollar and rupee denominated bonds. However, the maturity on such bonds, must be for a minimum of 5 years. On the other hand mutual funds can raise money for infrastructure debt funds through the issue of units to unit holders.

Infrastructure Debt Funds: Are they risky?

The nature of infrastructure itself is risky because of the long gestation period of such projects and also because they are capital intensive. Getting approvals and clearances for infrastructure projects is never easy, which is one of the big reasons for delay in such projects.

So, there is always an element of risk in projects and the returns for an Infrastructure Debt Fund would always come in the long term.

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