ICICI Bank, 3 others launch debt fund

ICICI Bank and three other financial institutions on Monday agreed to float India's first infrastructure debt fund (IDF) with a capacity to raise up to $2 billion to finance infrastructure projects that require a whopping one trillion dollars in the next five years.

The country's largest private sector lender, together with a wholly owned subsidiary, will have a 31 per cent equity in the company, while Bank of Baroda (30 per cent), Citicorp Finance India Ltd (29 per cent) and LIC (10 per cent) will bring the rest of the equity to the non-banking finance company (NBFC).

A memorandum of understanding to set up the fund was signed on Monday in the presence of Finance Minister Pranab Mukherjee, who said IDFs would meet the long-term need of infrastructure-sector funding and serve as a guiding principle for future activities.

The IDF will raise debt capital from domestic as well as foreign resources and invest in infrastructure projects under the public-private partnership model that have completed one year of operation. The funds may be deployed in the next two-three years.

"We will have an additional source of funding with this IDF. Banks' exposure limits can be freed up," said Chanda Kochhar, MD and chief executive officer, ICICI Bank.

Kochhar said once the company is formed in the next few months, roadshows would be conducted to familiarise investors with IDF, a new project even by global standards. Initial fund raising would take time but deployment of funds would be easier, she added.

The company will have an equity capital of Rs 300 crore and the option to raise an equal amount of tier-II capital through instruments such as bonds.

"The Indian banking sector by itself will simply not be able to finance India's infrastructure needs. Our IDF will have an extraordinary opportunity to act as a catalyst to channelise domestic savings and global liquidity to create an alternative pool of capital. We expect to attract capital from both local and international debt investors alike," said Pramit Jhaveri, CEO, Citi India. Bank of Baroda Chairman and managing director Mallya also said the IDF would start operations in the next financial year.

Various ways have been tried in the past to fund infrastructure, including viability gap funding, but the needs are far more as these projects have a long gestation period and lead to mismatch between asset and liability for many lenders. Of the $1 trillion required for infrastructure sector in the next five years, 50 per cent would come from private sector through the PPP model. Besides ICICI Bank, many other lenders including IIFCL, IDBI Bank are also planning to set up IDFs.

Mukherjee, in his Budget speech for 2011-12, had announced setting-up of IDFs. To attract off-shore funds into IDFs, he had also announced withholding tax on interest payments on the borrowings by the IDFs would be reduced from 20 to five per cent. Income of the IDFs has also been exempt from income tax. IDFs are allowed to be set up either as an NBFC or as a mutual fund.