Core debt funds allowed to take shape of MF, NBFC

The government has set the ball rolling on the proposed infrastructure debt funds to leverage foreign resources for a sector that needs over a trillion dollars in the Twelfth Five-Year Plan.

The finance ministry on Friday put in place the framework and structure for infrastructure debt funds (IDFs), allowing them to be set up as trusts or companies. "A trust-based IDF (mutual fund) would be regulated by SEBI (while) an IDF set up as a company ( NBFC )) would be regulated by RBI," the ministry said in a statement.

The two regulators will issue detailed IDF guidelines later. Broadly, a trust-based IDF would be like a mutual fund that would raise funds by issuing rupee-denominated units while the one structured as a company would be akin to a nonbanking financial company that raises money through bonds. Finance Minister Pranab Mukherjee had proposed such funds in the 2011-12 budget, which would largely tap overseas insurance and pension funds for long-term funds.

The budget had lowered the withholding tax on interest payments on IDF borrowings from 20% to 5% to make them attractive to overseas investors. Besides, IDF income was exempted from income tax. "This proposal opens up new ways for pension funds and insurance companies globally to invest in (India's) infrastructure sector," said Feedback Ventures chairman Vinayak Chatterjee.

The government has been finding it difficult to raise debt funds for infrastructure for want of appropriate institutions. Banks, the biggest mobilisers of savings, face a big asset-liability mismatch in providing long-term funds to infrastructure because their deposits are of much shorter maturities, mostly less than five years.

The rules allow these funds to buy out existing infrastructure loan portfolios of banks, freeing up their resources. As it is, many banks have reached their exposure limits to the sector, restricting their ability to lend. "They have recognised the asset-liability mismatch faced by banks and this will help them reduce their exposure to the infrastructure sector," said Chatterjee. (Economic Times)