Indian Railways is set to receive Rs 2,000 crore from Life Insurance Corporation (LIC) as part of long-term funding tied up with the state-run insurer to restart the investment cycle. The first tranche is part of the total Rs 1.5 lakh crore long-term funding that LIC will provide under the institutional financing mechanism.
The investment by LIC, to be made through bonds issued by railway entities such as Indian Railway Finance Corporation (IRFC), would be channelised in capacity augmentation projects. The funds will be available to the railways at a rate of 30 basis points over a 10-year benchmark yield. The bonds will come with a five-year moratorium on interest and loan repayment. The tenure is 30 years followed by payment of interest from sixth year to 10th year. From the 11th to the 30th year, the loan will be repaid in equated instalments.
Railways has over the years failed to execute a large shelf of its sanctioned projects due to non-availability of sufficient resources as the national transporter suffered from consistent under investment in its capital works programme.
With significant time and cost over-runs on key projects plaguing revenue realisation, Rail Minister Suresh Prabhu had announced a new source of funding — Extra Budgetary Resources (Institutional Financing or EBR(IF) — in this year’s rail Budget presented in Parliament in February. The LIC funding is expected to be the main source of EBR(IF).
The idea is to borrow funds from institutional sources to ensure availability of funds for the next five years for completion of projects critical for railways for generation of revenue. “LIC will hand over the first cheque of Rs 2,000 crore to IRFC towards financial assistance to railways as per the agreement signed earlier in March,” said a rail ministry spokesperson.
The ministry has not disclosed the interest rate for the LIC funds. Officials said the allocations made under EBR(IF) would be utilised for priority works under various plan heads, including new lines, gauge conversion, doubling and signaling, and telecom works in order to enhance throughput on congested corridors.
“Since the cost of funds from institutional financing would be based on market rates, the utilisation of these funds should be carried out with utmost prudence and propriety and only the justifiable expenditure pertaining to the work should be booked through these funds,” the ministry said, in an instruction to the general managers of its 16 zonal railways.
The LIC funds will be drawn initially by IRFC by issuing bonds to which LIC would subscribe. The amount raised by IRFC through these bonds will be provided to Indian Railways as pre-lease disbursement similar to a project advancement or deposit towards execution of identified projects.
While Indian Railways will execute the projects, IRFC will own the project assets to the extent funded by the public sector undertaking and will lease the assets to Railways. The land underlying the projects will be licensed to IRFC for the duration of the lease. Indian Railways will pay the lease charges to IRFC enabling the PSU to redeem the bonds issued to LIC. These charges will consist of capital repayment component and the interest component.
The ministry is working on a capital investment target of Rs 1 lakh crore for the current financial year. Around 40 per cent of this would be sourced from the finance ministry as gross budgetary support or the Centre’s financial assistance and around Rs 17,600 crore is to be sourced as EBR(IF). This is part of a bigger plan to spend Rs 8.5 lakh crore over the next five years.
S B Mainak, MD, LIC described it as a “golden day” what with LIC having found a partner in the Indian Railways.