Separate regulatory regime for infra debt funds by May

With funding requirements posing a major challenge for the infrastructure sector, the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) are in consultation with the government for creating a separate regulatory framework for infrastructure debt funds.

A draft is expected to come out some time in April after which the final norms would be notified. “The work is on a fast track and we are aiming to have the new framework by May,” a senior government official told Business Standard.

The guidelines would not only aim at making long-term funds available for the sector but also ensure adequate transparency in the flow of funds.

The official said that if the fund was floated by a trust, it would be regulated by Sebi, and if floated by a company it would be regulated by RBI. “We are considering both the options of allowing trust and companies to float the funds. A decision on this is yet to be taken,” he said.

The debt funds would need to be registered with either of the two regulators. While there is not likely to be any bar on the entry, they would also need to file returns with the regulators in order to ensure that the debt was being utilised for infrastructure projects and were not diverted for any other purpose. In case of the registration application is denied, they would have the right to appeal with the regulator.

The official said there was a need for more relaxed norms for infrastructure funding since they require long-term funds but the framework would be worked out in such a way that prudential norms were not compromised.

The finance ministry has held several rounds of discussions on the proposed regime with the regulators Sebi, RBI, Insurance Regulatory Authority of India (Irda) and PFRDA and financial institutions including LIC, IDFC and IFCI.

While recommending that a single infrastructure debt fund be created, a committee under Deepak Parekh had suggested changes in the regulatory regime of Sebi, RBI and Irda. It had suggested that investments in the fund’s instruments that have the credit rating of AA or above should be notified as approved investments by insurance companies and pension funds.

The proposed regulatory regime would create an enabling regulatory environment for infrastructure lending during the Twelfth Five-Year Plan, beginning 2012. The government has estimated that the total investment in infrastructure is expected to shoot up to $1 trillion (Rs 45 lakh crore) in the Twelfth Plan as against $514.04 billion in the Eleventh Plan and $217.86 billion in the Tenth Plan.

In order to encourage floating of such funds, Finance Minister Pranab Mukherjee has announced exemption of such funds from any income-tax under section 10 of the Income Tax Act.

A new section 194LB would also be inserted to provide a concessional rate of 5 per cent tax on interest income received by a non-resident. “Registration of funds would ensure that tax benefits are not misused,” said the official.