The Government of India has announced setting up of Infrastructure Debt Funds (IDFs) in order to accelerate and enhance the flow of long term debt in infrastructure projects for funding the government’s ambitious program of infrastructure development. To attract off-shore funds into IDFs Finance Minister has also announced  reduction in withholding tax on interest payments on the borrowings by the IDFs from 20% to 5%. The income of the IDFs will be exempt from income tax.

Broadly the structure of IDFs is as follows:-

1.  An IDF may be set up either as a Trust or as a company. A trust based IDF would normally be a Mutual Fund (MF) that would issue units while a company based IDF would normally be a form of NBFC that would issue bonds;

2.  An IDF would have to be registered in India and regulated by one of the financial regulators. A trust based IDF (MF) would be regulated by SEBI; and an IDF set up as a company (NBFC) would be regulated by RBI.

3. The investors would primarily be domestic and off-shore institutional investors, especially Insurance and Pension Funds who have long term resources. Banks and FIs would only be allowed to invest as sponsors of an IDF.

4.  In case of an IDF that issues bonds, credit enhancement inherent in Public Private Partnership (PPP) projects would be available. Such IDFs would refinance PPP projects after their construction is completed and they have successfully operated for at least one year. Such projects would involve a lower level of risk and consequently a higher credit rating. Such a structure would enable flow of Insurance and Pensions Funds at competitive costs in order to channelize low cost long term debt in PPP projects in infrastructure sectors such as roads, ports, airports, railways, metro rail etc.

5. In case of IDFs that issue units, greater credit risk would be borne by the investors who will be free to seek correspondingly higher returns. MFs would be especially useful for non PPP projects.

    Infrastructure projects given their long pay-back period require long-term financing in order to be sustainable and cost effective. However, banks which have been the main source of funding these projects are unable to provide long-term funding given their asset-liability mismatch. Moreover, banks are also approaching their exposure limits. IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of savings like Insurance and Pension Funds which have hitherto played a comparatively limited role in financing infrastructure. By refinancing bank loans of existing projects the IDFs are expected to take over a fairly large volume of the existing bank debt that will release an equivalent volume for fresh lending to infrastructure projects. The IDFs will also help accelerate the evolution of a secondary market for bonds which is presently lacking in sufficient depth.   

    Thus the IDFs would enable sourcing of funds through alternate sources which would help in bridging the likely debt gap.

    IDF is a novel attempt to address the issue of sourcing long term debt for infrastructure projects. RBI will issue Regulations for setting up of IDFs  and  the structure of IDFs would be closely reviewed for its efficacy and further refinement.

Details of the structure of the IDFs approved by the competent authority may be seen at the following link:-
    http://finmin.nic.in/press_room/2011/infra_debt_fund.pdf