IDFs are yet to take shape in the country

It would be purposeful for taking steps towards simultaneously developing IDF and bond market, says SK Goel, Chairman & Managing Director, IIFCL, in an email interview with Infrastructure Today.

In 2009, government launched nine infra related debt funds with an aim of raising Rs 20,000 crore. However, until now, only three have been able to raise money. In this situation how will the new recommendation work?
Infrastructure Debt Funds (IDFs) are yet to take shape in the country as the infrastructure bond market is in its nascent stage. Till infrastructure bond market develops, IDFs may not find adequate avenues for investment and on the contrary till IDFs evolve, the infrastructure bond market may find it difficult to attract sufficient investments.

Therefore, it would be purposeful for taking steps towards simultaneously developing IDF and bond market. To begin with, government can pilot setting up of IDFs and infrastructure bond issues by advising banks to get part of their loans in eligible infrastructure projects/companies converted into listed bonds, which in turn can be off- loaded to Infrastructure Debt Funds – Mutual Funds (IDF-MF). As a result, investment in tradable IDF units would replace part of loan portfolio of banks.

In order to attract banks for such move, extending tax exemptions on units of IDFs swapped by banks for 2-3 years, may also be considered.

Similarly, banks may also be advised to swap their exposure in eligible infrastructure projects/companies for loans to NBFC – IDF taking over such exposure.

Though most of the fund management companies have knowledge about the benefits for their investors, they are still not clear about what will be offered to the borrowers. Your comments
IIFCL has already established an Asset Management Company for its IDF and is awaiting regulatory approval of registration of mutual fund to set up and manage IDF through MF route. IIFCL thinks that the value proposition which it intends to its offer to the borrowers is in terms of both as an avenue for converting their floating rate obligations to a fixed rate obligation at a very competitive rate (as they have many benefits like zero income tax which would enable them to offer competitive rates) and to free up the exposure limits of developers with other institutions like banks which may be used for other projects. However, borrowers may be reluctant to issue bonds and to lock in their liabilities at fixed rates in this interest rate regime.

What are the benefits of a loan from schemes based on IDF as compared to direct loans from banks?
IDFs replace borrowings of infrastructure projects/companies with bonds subscribed by them to convert floating rate liability to a fixed rate liability and to lower the cost of debt servicing. Further, Infrastructure projects/companies can also take advantage of improved rating at the time of issue of bonds, which becomes crucial and deciding factor for bond issue pricing and for success of takeout of existing bank borrowings by IDFs.

Further, shifting from bank loans to schemes based on IDFs would also help in freeing up of bank's exposure limits on developers, which can be used for new projects. IDFs also provide access to a new investor class which has huge investible surplus for long term (as apart from IDF, other investors such as insurance companies would also be investing in such bonds).

What are the guidelines specified for the moratorium period?
There are no guidelines specified for the moratorium period under IDFs. The projects qualifying for investment under IDFs may not require moratorium as IDF – MF are required to invest at least 70 per cent of the net assets in debt instruments or assets which are rated in investment grade. Further, IDF –NBFC can extend loans to post-COD projects set up under tripartite agreement with concessionaires.

What guidelines will be followed in case the project is terminated?
The possibility of termination of project qualifying for investment by IDF is remote as IDFs would generally invest in revenue generating infrastructure projects/companies. Further, there are no specific guidelines for remedies in case of termination of project. In such case, provisions of concession agreement would be applicable.

What kind of security arrangement is required for the loans?
The exposure of IDFs is secured by project assets, which coupled with suitable credit enhancement constitutes as security in infrastructure projects/companies. Coincidently, IIFCL is in the process of undertaking pilot transactions for Credit Enhancement and IIFCL is keen to launch it as new product after under taking pilot transactions.

What interest rates would be charged from the borrowers?
Interest rate on bonds subscribed by IDF – MF or loans extended by IDF – NBFC depends on credentials and ratings of infrastructure projects/companies at the time of subscription to securities of projects/companies which should be usefully lower than interest rate charged by banks.

Apart from setting up IDFs for infra finance, which are the other concerned areas that need more focus?
The resolution of sector-specific issues like land acquisition, environmental clearance, availability of fuel and fuel linkage etc, faced by infrastructure companies and projects is necessary for rejuvenating and giving thrust to infrastructure financing in the country.