India outlines details for infra debt funds

The debt funds have been proposed to help fill a $300bn shortfall in infrastructure spending, and could pave the way for foreign institutional investors to play a greater role in supporting long-term financing for infrastructure projects.

India’s Ministry of Finance has outlined details of proposed Infrastructure Debt Funds (IDFs) that could enable both domestic and foreign pension funds and insurers to play a larger role in financing long-term infrastructure projects across the country.

The IDFs aim to address a lack of long-term debt to support infrastructure development, and to accelerate the growth of India’s secondary bond market, according to a statement from the Ministry of Finance. As banks are unable to provide sufficiently long-term funding and are reaching their “exposure limits”, the IDFs seek to target sources of savings like “insurance and pension funds which have hitherto played a comparatively limited role in financing infrastructure”, according to the statement.

The IDFs will be structured either as trusts or companies. The trusts would typically be mutual funds, which would be required to invest at least 90 percent of their assets in debt securities of infrastructure companies. The IDF companies would issue dollar- or rupee-denominated bonds for public-private partnerships that have been in operation for at least one year. Those bonds would be tradeable and have a minimum maturity of five years.

The trusts will be regulated by the Securities and Exchange Board of India, while companies will be regulated by India’s central bank, the Reserve Bank of India.

In order to increase investment from offshore funds, the Ministry of Finance has made income from IDFs tax-exempt and reduced withholding tax on the IDFs to 5 percent, according to the statement.

The Indian government had previously estimated that the country faces a shortfall of $300 billion in order to achieve the targeted $1 trillion in infrastructure spending by 2017

The Finance Minister had previously announced the launch of the IDFs in his 2011 to 2012 budget speech, and the IDFs are one of several steps the Indian government has taken to increase support for long-term financing for infrastructure projects.

Last year, the government increased the cap on foreign institutional investor commitments in government and corporate bonds by $5 billion each, and eased External Commercial Borrowing guidelines to allow for refinancing of some domestic rupee-denominated loans with longer term sources of financing.