INFRASTRUCTURE DEBT FUNDS.

[Mr. M. GOVINDARAJAN]

                        Developing the infrastructure is now on the progress.  In order to accelerate and enhance the flow of long term funds to infrastructure projects the Government has brought out with the broad structure of Infrastructure Debt Funds (‘IDF’ for short).  IDF may be set up either as mutual fund (IDF-MF) or as non banking finance companies (IDF-NDFC).   The IDF-MF is regulated by SEBI for which SEBI has amended the Mutual Funds Regulations to provide regulatory framework for IDF-MFs by inserting Chapter VI-B to the Mutual Funds Regulations.  IDF-NBFCs are regulated by the Reserve Bank of India. 

IDF-MF:

                        Banks may act as sponsors to IDF-MFs subject to adherence to SEBI regulations.  All NBFCs would be eligible to sponsor IDFs as MFs with prior approval of RBI subject to the following conditions, in addition to the conditions prescribed by SEBI:

• The NBFC should have a minimum net owned funds of Rs.300 crore and capital to risk weighted assets (‘CRAR’) of 15%;
• Its net NPAs should be less than 3% of net advances;
• It should have been in existence for at least 5 years;
• It should be earning profits for the last three years and its performance should be satisfactory;
• The CRAR of the NBFC post investment in the IDF-MF should not be less than the regulatory minimum prescribed for it;
• The NBFC should continue to maintain the required level of NOF after accounting the regulatory minimum prescribed for it;
• There should be no supervisory concerns with respect of the NBFC.

IDF-NBFC:

                        A bank to act as IDF-NBFC is to contribute a minimum equity of 30% and maximum 49% of the IDF-NBFC.  A bank cannot, according to Section 19(2) of the Banking Regulations Act, 1949 cannot hold shares in excess of 30% of the paid up share capital of a company unless it is a subsidiary.  To get exemption from the said restriction it may apply to RBI.   RBI would recommend based on merits recommend to the Government to grant exemption from the provisions of Section 19(2) of the Act for investment in excess of 30% and up to 49% in the equity of IDGF-NBFC.  

                        IDF-NBFC shall have the minimum credit rating grade of ‘A’ of  CRISIL or equivalent rating issued by other accredited rating agencies such as FITCH, CARE and ICRA. 

                        Only NBFC-IFCs can sponsor IDF-NBFC with prior approval of RBI subject to the following conditions:

• Sponsor IFCs would be allowed to contribute a maximum of 49% to the equity of the IDF-NBFCs with a minimum equity holding of 30% of the equity of IDF-NBFCs;
• Post investment in the IDF-NBFC, the sponsor NBFC-IFC must maintain minimum CRAR and NOF prescribed for IFCs;
• There are no supervisory concerns with respect to the IFC.

Tripartite agreement:

                        ‘Tripartite agreement’ means an agreement between three parties, namely, the concessionaire, the Project Authority and IDF-NBFC that also binds all the parties thereto to the terms and conditions of other agreements referred to therein.  IDF-NBFCs are required to enter into tripartite agreement.  The agreement should be for the following:

• Take over a portion of the debit of the concessionaire (a party which has entered into an agreement with a project authority for developing infrastructure) availed from senior lenders;
• A default by the concessionaire shall trigger the process for termination of the agreement between Project Authority and concessionaire;
• The Project Authority shall redeem the bonds issued by the concessionaire which have been purchased by IDF-NBFC, from out of the termination payment as per the tripartite agreement and other agreement referred to therein (compulsory buyout);
• The fee payable by IDF-NBFC to the Project Authority as mutually agreed upon between the two.

CONDITIONS FOR BANKS TO ACT AS SPONSORS TO IDF-MF AND IDF-NBFC:

• Investment by a bank in both should not exceed 10% of the bank’s paid up share capital and reserves;
• Investment in the equity of a bank in subsidiary companies, financial services companies, financial institutions, stock and other exchanges put together should not exceed 20% of the bank’s paid up share capital and reserves and this limit will also cover bank’s investments in IDFs as sponsors;
• Bank’s exposures to both by way of contribution to paid up capital as sponsors will form part of their capital market exposure and should be within the regulatory limits specified in this regard;
• The Banks should have clear polices and limits for their overall infrastructure exposure which should include their exposures as sponsors to IDFs;
• Disclosure should be made in the prospectus/offer document at the time of inviting investments that the sponsoring bank’s liability is limited to the extent of its contribution to the paid up capital;

FOREIGN INVESTMENT IN IDF:

                        SEBI registered foreign institutional investor and a non resident Indian may invest in securities other than shares or convertible debentures subject to such terms and conditions.  RBI has now decided to allow to investment on repatriation basis by eligible nonresident investors in-

• Rupee and foreign currency denominated bonds issued by the infrastructure debt funds set up as an Indian company and registered as non banking financial companies with RBI; and
• Rupee denominated units issued by IDFs set up as SEBI registered domestic Mutual funds, in accordance with the terms and conditions stipulated by SEBI and RBI from time to time.

Conditions:

                        The above said investments are subject to the following terms and conditions:

Eligible Non resident investors:

• Sovereign wealth funds, multilateral agencies, pension funds, insurance funds and endowment funds which are registered with SEBI as eligible non resident investors in FDIs (SEBI registered eligible non resident investors in IDFs);
• SEBI registered FIIs;
• NRIs defined in Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2000 as amended from time to time;
• High Net worth Individuals (HNI) registered with SEBI as sub accounts of SEBI registered FIIs or HNIs which are separately registered with SEBI as eligible non resident investors in IDFs in India.

Eligible instruments:

• SEBI registered eligible NRI – Foreign currency and Rupee denominated bonds and rupee denominated units issued by IDFs;
• SEBI registered FIIs – Foreign currency and Rupee denominated bonds and rupee denominated units issued by IDFs;
• SEBI registered FIIs who do not qualify as above – Rupee denominated bonds and units issued;
• NRIs – Rupee denominated bonds and units issued by IDFs;
• HNIs – Foreign currency and rupee denominated bonds and rupee denominated units issued by IDFs.

Maturity:

                        The maturity for the securities at the first time investment by a NRI shall be five years.

Lock in period:

                        The above investments are subject to a lock in period of 3 years.  However all nonresident investors can trade amongst themselves within this lock in period.

Foreign currency denominated bonds:

                        Foreign currency denominated bonds issued by IDFs would have to comply with all the terms and conditions (including all in cost) under the existing FEMA guidelines/regulations for External Commercial Borrowings (ECB) other than reporting requirements.

Quantitative limits:

                        All nonresident investment in IDFs (other than NRIOs) would be within an overall cap of US$10 billion only.  This limit would be within the overall cap of US$ 25 billion for FII investment in bonds/non convertible debentures issued by Indian companies in the infrastructure sector or by infrastructure finance companies.  There is no limit for NRI investment in IDFs by way of rupee denominated bonds/units.

Other conditions:

• IDFs set up as NBFCs may invest in debt securities of only public private partnership infrastructure projects which have a buyout guarantee and have completed at least one year of commercial operations;
• Refinance by IDGF would be upto 85% of the total debt covered by the concession agreement;
• IDFs set up as Mutual Funds would invest minimum 90% of its funds in debt securities of infrastructure companies or SPVs across all infrastructure sectors, project stages and project types;
• The facility of foreign exchange hedging would be available to the eligible nonresident IDF investors, IDFs as well as infrastructure project companies exposed to the foreign exchange/currency risk as per the extant provisions under Notification No. FEMA.25/2000-RB, dated 3.05.2000, as amended from time to time.