INFRASTRUCTURE DEBT FUND

[DR.MARIAPPAN GOVINDARAJAN]

An infrastructure debt fund (‘IDF’ for short) is a fund that pools money from investors to invest in infrastructure projects. The Infrastructure Debt Fund shall be set up as a Non-Banking Financial Company conforming to and satisfying the conditions laid down in the regulatory framework provided by the Reserve Bank of India.

Exemption

 Section 10(47) of the Income Tax Act, 1961 (‘Act’ for short) gives exemption to the income from the purview of the Act, derived from the IDF.

Investment of the Fund

 Rule 2(F), as amended from time to time, provides that the funds of the IDF shall be invested only in-

• post commencement operation date infrastructure projects which have completed at least one year of satisfactory commercial operations; or
• toll-operate-transfer projects as the direct lender.

Issues by IDF

 The IDF shall-

• issue rupee denominated bonds or foreign currency bonds in accordance with the directions of Reserve Bank of India and the relevant regulations under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, as amended from time to time;
• issue zero coupon bonds in accordance with rule 8B; or
•  raise funds through loan route under external commercial borrowings.

Terms and conditions

 Rule 2F (4) provides the terms and conditions for the issue of bonds as detailed below-

• rupee denominated bonds or foreign currency bonds - shall be in accordance with the directions of the Reserve Bank of India and the regulations;
• Zero coupon bonds – to be issued as per guidelines specified under Rule 8B (guidelines for notification of Zero-coupon bonds);
• External Commercial Borrowings - in accordance with the directions of the Foreign Exchange Department of the Reserve Bank of India. The tenor shall not be less than a period of 5 years and such borrowings shall not be sourced from foreign branches of Indian banks.

In case of an investor in the aforesaid bond being a non-resident the original or initial maturity of bond, at time of first investment by such non-resident investor, shall not be less than a period of 5 years.

Investment limit

 The investment made by the IDF in an individual project or project belonging to a group at any time, shall not exceed 20%, of the corpus of the fund.

Substantial interest

 No investment shall be made by the IDF in any project where its specified shareholder or the associated enterprise or the group of such specified shareholder has a substantial interest.

Associated Enterprise

 The expression ‘Associated enterprise’ in relation to another enterprise is defined under Section 92A of the Act as an enterprise-

• which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
• in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

Specified shareholder

 The expression ‘specified shareholder’ is defined under Rule 2F(viii) as a non-banking financial company, or a bank, or any other person holding, directly or indirectly, shares carrying not less than 30% of the voting power in IDF.

Substantial interest

 A person shall be deemed to have substantial interest in –

• a company if he is the beneficial owner (including beneficial ownership held by one or more of his relatives, in case the person is an individual) of shares (not being the shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than 10% of the voting power; or
• a concern other than a company if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such concern.

Relative

 The term ‘relative’ in relation to individual is defined under explanation to Rule 2F(9) (vii) as-

1. spouse of the individual;
2. brother or sister of the individual;
3. brother or sister of the spouse of the individual;
4. brother or sister of either of the parents of the individual;
5. any lineal ascendant or descendant of the individual;
6. any lineal ascendant or descendant of the spouse of the individual;
7. spouse of the persons referred to in sub-clauses (b) to (f); or
8. any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.

Return

 The IDF shall file its return of income as required by 139(4) of the Act before the due date.

Features

 The following are the features of Infrastructure fund debt – mutual funds-

• Mutual Fund with focus on long term Infrastructure Debt
• Close-ended
• Dividend & Growth Option
• 100% financed through issuance of rupee-denominated units
• Minimum tenor of 5 years with option of structuring for longer tenors
• Interval scheme with a lock-in period of 5 years for investors
• Minimum investment of Rs. 1 Cr with Face Value of Rs. 10 Lakh/unit
• Minimum 5 investors with none of the single investor to hold more than 50% of net assets of the scheme
• At least 70% investment in Investment Grade rated, i.e., BBB- and above
• SEBI is the regulator.

IDF is an emerging investment vehicle which as per regulations can be created in the form of Mutual Fund or NBFC to invest in the infrastructure sector. IDF in Mutual Fund (IDF – MF) format is regulated by SEBI (Mutual Funds) Regulations, 1996, whereas IDF in NBFC format is governed by Reserve Bank of India (RBI). The Asset Management Company (AMC) of the fund manages the funds of the various IDF schemes. It Provides an opportunity to long term investment by FIIs, Pensions Funds, Insurance Cos, Sovereign Wealth Funds and other investors.

 

Reference:

1. https://iifclmf.com/what-is-infrastructure-debt-fund/.