IDFs to be set up as trusts, companies

RBI and Sebi to come out with regulations in their respective domains.

The finance ministry has finalised the structure of the infrastructure debt funds (IDFs) proposed in the Budget.

The IDF may be set up either as a trust or as a company. A trust based IDF would normally be a mutual fund (MF) that would issue units while a company-based IDF would be a form of NBFC that would issue bonds.

The trust based IDF (MF) would be regulated by Securities and Exchange Board of India (Sebi) and an IDF set up as a company (NBFC) would be regulated by the Reserve Bank of India (RBI).
 

STRUCTURE OF IDF

AS A TRUST

• Would be regulated by SEBI. 
• Any domestic entity could be the sponsor. 
• Would raise resources through Rupee denominated units of minimum 5 year maturity.
• Units would be listed in a recognized stock exchange and trade-able among equivalent (domestic vs. foreign) investors.
• Would have to invest minimum 90% of its assets in the debt securities of infrastructure companies or SPVs.
• Returns on assets will pass to the investors directly, less the management fee.
• Credit risks will be borne by the investors and not by the IDF.
• Can be launched either as close-ended scheme maturing more than five years or an Interval scheme with lock-in period of five years. 
• Would have minimum 5 investors, each holding not more than 50% of net assets of the scheme.
• Minimum investment would be one crore rupees with Rs. 10 lakh as minimum size of the unit.

IDF AS A COMPANY

• Would be regulated by RBI. 
• Could be set up by one or more sponsors, including NBFCs, IFCs or banks.
• Would be allowed liberal prescription of risk-weightage (50% instead of 100%).
• Net owned funds (minimum Tier I equity of Rs. 150 crore) and exposure norms (not as a %age of net-owned funds).
• Would raise resources through either rupee or dollar denominated bonds of minimum 5 year maturity.
• Bonds would be tradeable among equivalent (domestic vs. foreign) investors. 
• Would invest in debt securities of only PPP projects which have a buy out guarantee and have completed at least one year of commercial operation. 
• Refinance by IDF would be upto 85% of the total debt covered by the concession agreement. 
• Credit risks associated will be borne by the IDF.
• Potential investors would include off-shore institutional investors, off-shore High Net-worth Individuals (HNIs), NRIs and domestic institutional investors.

Both the regulators would come out with the regulations on setting up of the IDFs falling in their respective domains.

The investors in the IDFs would primarily be domestic and off-shore institutional investors, especially insurance and pension funds with long-term resources. Banks and FIs would only be allowed to invest as sponsors of an IDF.

In case of an IDF that issues bonds, credit enhancement inherent in Public Private Partnership (PPP) projects would be available. Such IDFs would refinance PPP projects after their construction is completed and successfully operated for at least one year.

Such projects would involve a lower level of risk and consequently a higher credit rating. This structure would enable flow of insurance and pensions funds at competitive costs in order to channelise low-cost long-term debt in PPP projects in infrastructure sectors such as roads, ports, airports, railways and metro rail.

In case of IDFs that would issue units, greater credit risk would be borne by the investors who would be free to seek correspondingly higher returns. MFs would be especially useful for non-PPP projects.

Sebi has formulated a draft chapter that would be inserted in the existing mutual fund regulations for permitting setting up of IDFs on this route by registered MFs as a scheme.

Finance Minister Pranab Mukherjee, in his Budget speech for 2011-12, had announced setting up of infrastructure debt funds (IDFs) to accelerate and enhance the flow of long-term debt in infrastructure projects.

To attract off-shore funds into IDFs, the finance minister had also announced that withholding tax on interest payments on the borrowings by the IDFs would be reduced from 20 per cent to 5 per cent. Income of the IDFs has also been exempt from income tax.