RBI, Sebi to regulate infra debt funds

    NEW DELHI: The government has finalised the structure of the infrastructure debt funds announced in the 2011-12 budget aimed at attracting long-term funds to boost the country's creaky core sector.
    A finance ministry statement said the Reserve Bank of India (RBI) will issue regulations for setting up of infrastructure debt funds (DFs) under the company route. An IDF may be set up either as a trust or as a company. A trust based IDF would be a mutual fund that would issue units while a company based IDF would be a non-banking finance company (NBFC) that would issue bonds.
    The finance ministry said an IDF would have to be registered in India and regulated by one of the financial regulators. A trust based IDF would be regulated by the stock market regulator -- Securities and Exchange Board of India ( SEBI) -- while an IDF set up as a NBFC would be regulated by the RBI.
    Finance minister Pranab Mukherjee in his budget speech had announced setting up of IDF's to accelerate and boost the flow of long-term debt in infrastructure projects. To attract off-shore funds into IDFs, the government had announced that withholding tax on interest payments on the borrowings by IDFs would be reduced from 20% to 5% while the income of IDFs would be exempt from income tax.
    India has huge infrastructure funding needs and intends to spend nearly $1 trillion in five years from 2012-2017 to shore up roads, ports, highways and airports to sustain rapid economic growth. The finance ministry statement said 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 have been in operation for at least one year. In case of IDFs that issue units, greater credit risk would be borne by the investors who will be free to seek higher returns. Mutual funds would be particularly useful for non PPP projects. The IDFs are also expected to help develop a robust secondary market for bonds.
    IDF as a trust
    Any domestic entity regulated by a financial sector regulator could be the sponsor. The role of the sponsor will be to responsibly deploy the investor funds into viable assets and ensure highest returns for the investors and to manage all associated functions like book-keeping
    It would raise resources through issue of rupee denominated units of minimum five year maturity, which would be listed in a recognized stock exchange and trade- able among equivalent (domestic vs. foreign) investors.
    IDF as a company
    It could be set up by one or more sponsors, including NBFCs, infrastructure finance companies or banks.
    It would raise resources through issue of either rupee or dollar denominated bonds of minimum 5 year maturity, which would be tradeable among equivalent (domestic vs. foreign) investors.
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