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Infrastructure Debt fund (IDFs) represent a unique Financial Instrument designed to address the challenges associated with financing infrastructure projects. As essential components of economic development, infrastructure projects often require substantial investments, extended gestation periods, and long-term financing solutions. Traditional funding sources, such as commercial banks, may face limitations in providing the necessary Capital for these projects due to regulatory constraints or risk considerations.
In response to these challenges, governments and financial institutions have introduced Infrastructure Debt Funds as specialised investment vehicles tailored to meet the financing needs of infrastructure projects. IDFs offer an alternative avenue for channelising long-term investment into the infrastructure sector, thereby facilitating the development of vital public assets such as transportation networks, energy facilities, and urban infrastructure. In this article, let's explore the purpose, benefits, and functioning of infrastructure debt funds, highlighting their role in supporting sustainable Economic Growth and fostering infrastructure development.
Infrastructure Debt Funds (IDFs) are investment vehicles that can be established by commercial banks and Non-Banking Financial Companies (NBFCs) in India. These funds allow domestic and Offshore institutional investors, mainly insurance and pension funds, to invest in them through units and Bonds issued by the IDF. The primary purpose of IDFs is to refinance existing debt of infrastructure companies, thereby freeing up capital for banks to lend to new infrastructure projects.
IDF-NBFCs are responsible for taking over loans extended to infrastructure projects, particularly those developed through the Public-Private Partnership (PPP) route, which have completed at least one year of commercial production. IDFs can be established either as a Trust or as a Company. A trust-based IDF typically functions as a Mutual Fund (MF) and falls under the Securities and Exchange Board of India (SEBI) regulation. At the same time, a company-based IDF usually functions as a Non-Banking Financial Company (NBFC) and is regulated by the Reserve Bank.
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Here are the key features of IDF MF:
100% financed via the issue of rupee-denominated units
A minimum of 70% investment in Investment Grade rated, i.e., BBB- and above
Infrastructure sector at a lifecycle stage of a project with an investment of 90%-debt securities / securitised debt instruments of -
Jotted down below is the purpose of IDF:
The IDF initiative in India aims to tackle the challenge of accessing long-term financing for infrastructure projects.
The establishment of IDFs was introduced to enhance and expedite the provision of long-term finance for infrastructure projects.
IDFs serve as a supplementary funding source for infrastructure projects, Offering a mechanism to refinance existing infrastructure debt, which commercial banks predominantly finance.
Here are some major benefits of IDFs:
Through refinancing ongoing project bank loans, IDFs are poised to assume a considerable portion of the current bank debt, thereby releasing funds for fresh infrastructure financing initiatives.
Public-Private Partnership (PPP) projects facilitated by IDFs would benefit from inherent credit enhancement, potentially resulting in lowered risk levels and, consequently, higher credit ratings.
IDFs are expected to serve as conduits for directing the long-term, low-cost resources of Provident Funds and Insurance Funds towards infrastructure projects.
Furthermore, establishing an IDF is anticipated to contribute to the growth of a secondary bond Market.
Here, sponsorship refers to equity participation by the NBFC, typically ranging from 30% to 49% of the IDF's total ownership. While IDF-MFs can be sponsored by banks and NBFCs, only banks and Infrastructure Finance companies can sponsor IDF-NBFCs.
Here is how sponsorship can be approved:
NBFCs intending to sponsor IDF-MFs must adhere to the following criteria:
NBFC-IFCs must fulfil the following criteria to sponsor an IDF-NBFC:
A Tripartite Agreement involves three parties:
It binds these parties collectively and establishes the following:
The eligibility criteria for an IDF-NBFC are as follows:
IDF-NBFCs do receive certain concessions on credit concentration norms. The maximum exposure that an IDF-NBFC can have on individual projects is limited to 50% of its total Capital Funds (comprising Tier I and Tier II) rather than its Owned Funds as in the case of regular NBFCs. Additionally, the Board of the IDF-NBFC may allow an additional exposure of up to 10% at its discretion. Furthermore, if the financial position of the IDF-NBFC is deemed satisfactory by the RBI, and upon Receipt of an application from the IDF-NBFC, the RBI may permit an additional exposure of up to 15% (over 60%), subject to certain conditions and additional prudential safeguards as deemed fit by the RBI.
For calculating the capital adequacy of IDF-NBFCs, bonds covering Public-Private Partnership (PPP) and Commercial Operations Date (COD) projects that have existed for over a year since commercial operation will be assigned a risk weight of 50%.
The importance of infrastructure debt funds lies in the distinct and challenging nature of infrastructure financing, which differs significantly from other forms of funding. With its substantial requirements, protracted gestation period, and prolonged financing needs, infrastructure lending burdens the Economy considerably. Therefore, Infrastructure Development Funds have the potential to alleviate this burden significantly.