Govt infra debt funds this fiscal just for Indian investors

The government will launch its first infrastructure debt fund (IDF), with a likely corpus of $3 billion, within this fiscal, but will restrict participation to domestic investors - to begin with, Economic Affairs Secretary R Gopalan said on Thursday.

"The initial process is (that) one fund gets established (and) probably all the issues around the IDF will disappear. We are trying to set up one indigenously with some banking institutions and others," he said here.

The first fund, he clarified, would comprise only Indian investors. Only subsequently would foreign participation be brought in. "We will tweak the scheme in such a way that it enables more such funds to be set up," he added.

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With about $1 trillion of investments in the infrastructure sector expected in the upcoming 12th Plan Period, IDFs are part of the government's plan to bring in long-term debt into the sector primarily using domestic and off-shore institutional investors, particularly insurance and pension funds.

"Our view is that it is a good function to perform. For, that will reduce the cost of infrastructure funding beyond the commercial operation date (COD) stage and relieve the banks from the asset-liability mismatch which they get into," Gopalan said, speaking on the sidelines of an event organised by the Indian High Commission and ISAS. Apart from being unable to provide long-term funding to infrastructure projects due to their asset-liability mismatch, banks are also approaching their exposure limits to the sector.

IDFs are expected to provide long-term, low-cost debt for infrastructure schemes, while freeing up existing bank debt for fresh lending.

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While the likely size of the first IDF may be about $3 billion, Gopalan explained the quantum of the initial corpus would be limited by the extent of equity that can be put in right at the start.

"Where the problem comes is that if there are some sponsors, there is a reserve requirement and to what extent leveraging can be done. There are some norms which have been put in place. Unless you have a huge capital base, you cannot look at a huge fund. The option then is that you have smaller funds," he said.

However, the government is still undecided on the route it should take for establishing the IDF. The fund can either be set up as a trust, wherein it would be akin to a Sebi-regulated mutual fund or as an RBI-monitored non-banking financial company (NBFC).

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"We are looking at both of them," Gopalan said. "The NBFC route has more number of regulatory provisions, whereas the mutual fund side the number of regulations are a lot less. Suppose you have a lot less regulation but are looking at a higher yield and return, there are some set of investors who are willing to take that."

But with the participation of off-shore funds, even if excluded at the onset, crucial for the success of the IDF scheme, Gopalan is courting Singapore's financial sector and will be meeting representatives of the city-states' sovereign wealth funds, Temasek and GIC, as well as those from Citibank, HSBC, UBS and DBS Bank.