India’s first, $2bn infra debt fund launches

ICICI Bank, Bank of Baroda, Citigroup and Life Insurance Corporation of India are backing the country’s first infrastructure debt fund, which will seek to raise up to $2bn to deploy to PPP projects. India is looking to spend $1trn refurbishing its infrastructure over the next five years.

A number of blue chip Indian financial institutions signed a memorandum of understanding yesterday, at a ceremony presided by Indian Finance Minister Pranab Mukherjee, to launch India’s first infrastructure debt fund.

ICICI Bank – India’s biggest commercial bank – state-backed Bank of Baroda, Citicorp Finance – a subsidiary of Citigroup – and Life Insurance Corporation of India have teamed up to launch the debt vehicle, which is aiming to raise up to $2 billion to invest in public-private partnerships (PPP) projects across the country.

The fund, which is being set up as a non-banking finance company, will start with about $60 million of equity from its sponsors. ICICI Bank owns 31 percent of the vehicle, followed by Bank of Baroda with 30 percent, Citicorp Finance with 29 percent and Life Insurance Corporation of India owning the remaining 10 percent. 

In a statement, the Indian authorities said the fund “would seek to raise debt capital from domestic as well as foreign resources,” outlining a number of tax breaks to attract investors:

“To attract off-shore funds into IDFs [infrastructure debt funds], the Finance Minister had also announced that withholding tax on interest payments on the borrowings by the IDFs would be reduced from 20 percent to 5 percent. Income of the IDFs has also been exempt from income tax.”

The Indian authorities have been keen to encourage the launch of debt funds to plug a long-term financing gap, as banks are seeing their capacity to fund PPPs increasingly constrained. The plan, as outlined in the government’s statement, is for these new funds “to invest in infrastructure projects [procured] under the PPP model that have completed one year of operations,” allowing banks to exit deals and channel funds to other greenfields once projects are up and running.

India, Asia’s third-largest economy, said it will spend $1 trillion on infrastructure over the next five years to 2017, trying to modernise a sector which is costing the country an annual 2 percentage points in potential gross domestic product (GDP) growth. The Indian authorities are hoping the private sector will fund half of its five-year infrastructure programme.

If successfully carried out, the infrastructure programme could bump Indian growth to 9 percent a year.