Pension, insurance funds could get to invest in infra

Tapping pension and insurance funds for infrastructure projects will soon be possible through infrastructure debt funds (IDFs), guidelines for which were announced by the government on Friday.

The rules to set up IDFs have inserted a critical clause that allows them to use the “credit enhancement” inherent in private-public partnership projects.

Sector specialists like Amrit Pandurangi, senior director at consultancy firm Deloitte said this was the missing link in channeling household savings to infrastructure projects, even though funds are available.

Broadly, the finance ministry has solved a problem where pension and insurance funds could not invest in papers which are rated less than ‘AA’ by credit rating agencies. But this is difficult for infrastructure projects to achieve unless they get a guarantee.

“To the extent IDFs solve the problem of tapping resources of pension and insurance funds for infrastructure projects, the rules are welcome,” said Pandurangi.

The government and various agencies have been trying to work out ways to close India’s $1-trillion gap in infrastructure finance for the 12th Five-year Plan. As a further sweetener, the government has also decided to offer a withholding tax benefit and allowed five-year paper to qualify as long-term paper.

Since IDFs are supposed to be regulated by the Reserve Bank, the rules will now have to be approved by the central bank on the lines of NBFCs and infrastructure finance companies.

The government has also allowed IDFs to be set up as trusts under Sebi rules. But in that case, withholding tax benefit or credit enhancement route will not be available. These could be set up with a minimum capital of R150 crore.

The structure of IDFs would be closely reviewed for its efficacy and further refinement, a finance ministry statement said. “We have requested the government to ensure that not many laws are amended to operationalise these funds. I think that part has been taken care of,” said IIFCL CMD SK Goel. The IDF plan was proposed by finance minister Pranab Mukherjee in Budget 2011-12.

As a company, an IDF can float rupee or dollar-denominated bonds – but as trusts, only in rupees. It will have to invest 90% of the money raised in debt securities of infrastructure projects. These bonds could be traded among the domestic and foreign investors.

Banks, financial institutions and infrastructure finance companies (IFCs) can sponsor such funds. Domestic and offshore insurance and pension funds — having long-term investible resources — are seen as important sponsors of such funds.

To encourage foreign investors to participate in such funds, the government has reduced withholding tax on interest payments on IDF borrowings to 5% from 20%. The funds' income has also also been exempt from income tax.

Company-based IDFs would be allowed to fund PPP projects which have completed one year of commercial operations. Potential investors in this category include offshore and domestic institutional investors, high networth individuals and non-resident Indians.

The minimum investment by a trust-based IDF would be R1 crore with R10 lakh as minimum size of the unit.

Credit risks associated with underlying projects will be borne by the investors and not by the IDF, but in case of a company-based IDF, the fund would bear the risk.

The ministry said that IDF being a pass-through vehicle is easily workable if set up as a trust.

However, since a trust cannot issue bonds or undertake credit enhancement and cannot get withholding tax benefits, an IDF would also have to be allowed as a company. Banks face difficulties in lending to infrastructure projects which have long gestation periods. Since banks mostly lend short-term funds, this would result in an asset liability  mismatch.

Most banks are also nearing the maximum limit that they can lend to the infrastructure sector, the finance ministry said. IDFs will take over these exposures by refinancing bank loans, freeing up banks' money....