Infrastructure Debt Funds: Wait And Watch
Vidrum / 05 Mar 2012
According to the RBI guidelines, IDF–NBFC would raise funds through issuance of bonds with a minimum maturity of five years. The bond’s issue could either be rupee or dollar-denominated. The minimum capital required for setting up of an IDF–NBFC is Rs 300 crore and has to maintain CAR of 15 per cent. Its net NPAs should be less than 3 per cent of the net advances.
According to media reports, three major lenders, namely ICICI Bank, Bank of Baroda (BOB) and Citi Financials, are coming together to form the first IDF of its kind. ICICI, Citi Financials and BOB will hold stakes of around 30 per cent each while the balance would be shared by various other entities.
It must be noted that post the budget announcement, the response for setting up such funds has been poor. Most of the banks are still in the planning stage and have not come up with any definite proposals. ICICI Bank has been the only one so far to receive approval from the RBI for setting up this fund. As per market sources, IDBI has also applied to the RBI for approval.
We believe that infrastructure development is one of the key criteria that India has been lacking in. There are bottlenecks on the supply front that have resulted in higher inflation, thereby hurting the growth of the economy. For instance, about 40 per cent of the fruits and vegetables produced in India goes waste due to lack of storage, cold chain and transport facilities.
Every year the finance minister therefore allocates a major chunk of the expenditure to the development of infrastructure. For 2011-12, an allocation of over Rs 2,14,000 crore has been made which is 23 per cent higher than last year. This amounts to 48.5 per cent of the gross budgetary support to planned expenditure.
On the flip side, many of the projects are kept on hold due to various issues. Even in the case of new projects there are problems related to land acquisitions, environment clearance, etc which actually disallow any corporate to take up fresh proposals. Therefore, the government needs to look into the clearance and execution of the projects too apart from making provisions for funds.
Meanwhile, there are other instruments in the market such as tax-free bonds and infrastructure bonds which are raising funds to develop infrastructure in India. In the case of tax-free bonds the interest earned is exempted from taxation while in infrastructure bonds an additional deduction of Rs 20,000 is provided as exemption under Sec 80CCF. The government has also provided incentives in IDF to attract more participants. To attract foreign funds, withholding tax on interest payments would be reduced to 5 per cent from the earlier level of 20 per cent while in the case of residents the income from the IDF would be exempted from income tax.
We believe this IDF would probably come in the next fiscal and there may be more funds in FY13. One has to wait and watch out for various parameters like the interest rate, tenure and other details before investing in them.
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