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Infrastructure Debt Fund
    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 the Government 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(Mutual Fund) or as a company(NBFC).

2.  An IDF would have to be registered in India and regulated by one of the financial regulators(SEBI or RBI).

3. The investors would primarily be domestic and off-shore institutional investors. 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. PPP projects would focus on 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.

    IDF is a novel attempt to address the issue of sourcing long term debt for infrastructure projects. The IDFs will also help accelerate the evolution of a secondary market for bonds.
   
    Reserve Bank of India will issue Regulations for setting up of IDFs  and  the structure of IDFs would be closely reviewed for its efficacy and further refinement.

    The  offshore investors are invited for active participation in this initiative.
    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
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