RBI-IIFCL discord delays SPV for infrastructure projects

Differences between IIFCL & RBI pertain to the timeline as to when a project becomes NPA for the SPV

A special purpose vehicle (SPV) for the credit enhancement fund with respect to infrastructure projects has been delayed because of differences between Indian Infrastructure Finance Company Ltd (IIFCL), the principal promoter, and the Reserve Bank of India (RBI), the regulator, over the governing guidelines. 
 

The economic affairs secretary had a meeting with the RBI and IIFCL on this last week. 

The SPV has been in the making since February last year, when Union Finance Minister Arun Jaitley proposed it in his Budget speech as part of measures to promote the corporate bond market. 

The differences between IIFCL and the RBI pertain to the timeline as to when a project becomes a non-performing asset for the SPV and what the capital adequacy requirements for the organisation should be, senior officials told Business Standard. The RBI is of the view that since the asset remains the same both for lenders and the SPV, which would extend the credit enhancement, there should be similar capital in the system before and after the enhancement. This should be in addition to the overall 20 per cent capital requirement for the SPV. 

IIFCL, however, felt that the SPV should maintain capital in accordance with its own exposure since its liability is limited to the exposure. It was of the view that higher capital would make the entire exercise inefficient. IIFCL is expected to hold a 20 per cent stake in the SPV. When contacted, IIFCL Chairman and Managing Director Sanjeev Kaushik said issues related to the RBI guidelines were being resolved. “We have prioritised it (fund). We have incorporated the Credit Guarantee Company.” The initial corpus of the fund would be Rs 500 crore, he said. 

Officials, however, said the central bank also wanted the invoked guarantee to be repaid within 30 days from the date of invocation. Or else, if it remains unpaid for 90 days after the 30 days (total of 120 days), the project will become a non-preforming asset. 

IIFCL, however, contended that since infrastructure projects were of longer gestation, such a timeline would not serve the purpose. 

It, instead, proposed two scenarios where in the case of a partial invocation of the guarantee, the principal and interest are payable on bond maturity even though it accrues from the date of invocation. In the second scenario when there is a complete invocation of partial credit guarantee (PCG), interest and other charges are payable immediately. 

Though the RBI maintained that the invocation of PCG is an indication of chronic stress in a project, IIFCL contradicted it by saying this could also happen due to a temporary liquidity crunch due to unforeseen events. Besides, rating agencies would not enhance the rating if there is a condition of repayment of invoked guarantee within 30 days since it would not reduce the obligations of the project in case of stress. 

IIFCL also felt that the due date should be mutually decided by the parties and not the regulator in accordance with views of multilateral agencies. This would help the SPV to have flexibility and come up with structures on a case-to-case basis. The possible way out of the differences was that interest could be made payable monthly with a moratorium and the principal be repaid at maturity. Besides, the invoked PCG could be considered as preference capital.