To provide a push to infrastructure development, a committee under Housing Development Finance Corporation Chairman Deepak Parekh has suggested amending the rules to allow all insurance and pension funds to invest in the debt market.
It has endorsed the earlier idea of the Planning Commission to form a Rs 50,000-crore debt fund to finance infrastructure. It says this should be the initial corpus, and pension and insurance funds, among others, should be tapped for this. This would, it has noted, require a change of rules by the Securities and Exchange Board of India (Sebi), Pension Fund Regulatory and Development Authority and the Reserve Bank of India.
Under current rules, foreign insurance firms and pension funds can’t make such investments.
In its report to the Planning Commission, the Parekh committee further suggested the proposed infrastructure corpus be set up as a venture capital fund (VCF), to be managed and regulated by Sebi. For this purpose, Sebi should amend its guidelines for VCFs to enable investment in the debt market. Currently, only a part of a VCF is allowed to be invested in debt, the panel said.
Lack of funders
Infrastructure projects need project funds of 10-20 years, but banks are not able to provide such long-term funds because their assets (deposits) are of a shorter duration (5-10 years). “There is currently no dedicated source of funding for infrastructure, except India Infrastructure Finance Company Ltd (IIFCL) that provides both direct lending and refinancing. We need to make changes so that pension and insurance funds have the option of investing in long-term funds dedicated to infrastructure,” said Vishwas Udgirkar, executive director, PricewaterhouseCoopers.
The recommendations of the Parekh committee assume importance since infrastructure upgradation is required to sustain high economic growth. The estimated requirement during the XII Plan (2012-17) is the equivalent of $1 trillion (Rs 45 lakh crore).
Towards this end, the government had planned to strengthen the infrastructure bonds market. The current year’s budget allowed income tax exemption for investment up to Rs 20,000 in such bonds.
The fund, as originally proposed by the Planning Commission in February, was intended to address a critical need of infrastructure companies in India, which currently lack access to 10-year and 20-year funds for long-gestation projects like airports, ports and roads. The idea was that the fund’s lending tenure could span more than 10-20 years, with a condition that the entire repayment be completed three years prior to the expiry of the respective project contracts or concessions.
It is planned that the project company would issue a negotiable bond to the fund on the basis of a tripartite agreement between the fund, the project company and the project authority, such as the National Highways Authority of India or a state government.
Takeoff on earlier scheme
The proposed fund improvises upon the take-out financing scheme rolled out by IIFCL from April 16.
The scheme had not found many takers among banks. The scheme, where IIFCL was to enter into a pact with banks to take over some of their infrastructure loans on its books, was announced by Finance Minister Pranab Mukherjee in the Budget speech of July 2009.
“There is tremendous liquidity pressure on the banks. Take-out financing as proposed by the Planning Commission will relieve the banks of pressure and release more funds for infrastructure. Besides, there is a risk perception associated with a bank’s asset-liability mismatch. The risk profile will, therefore, come down,” said Udgirkar.
The Planning Commission had proposed raising Rs 20,000 crore from domestic insurance and pension funds, Rs 10,000 crore from foreign insurance and pension funds, Rs 10,000 crore from foreign sovereign funds and at least Rs 5,000 crore from multilateral agencies like the World Bank and the Asian Development Bank.
“For the creation of this fund, the government would act as a facilitator. The group has suggested certain tweaking of rules by the regulators. Now, it is up to them whether they take three months, a year, or two years for doing that,” said Gajendra Haldea, adviser to the Commission. The Commission would be sending its report soon to the finance ministry. It would, it is proposed, only cater to the fund requirements of projects that have begun commercial operations under the private-public partnership mode. The fund could earn a long-term spread of about 100 basis points above its rate of borrowing. The margin could be used to meet the operating costs and to create a corpus to meet the liabilities of nonperforming assets. The rate could be higher, depending on the risk perception associated with each project.