Infrastructure Debt Funds

In order to accelerate and enhance the flow of long term funds to infrastructure projects for undertaking the Government’s ambitious programme of infrastructure development, Union Finance Minister in his budget speech for 2011-12 had announced setting up of Infrastructure Debt Funds (IDFs). Accordingly, the Government has since come out with the broad structure of the proposed IDFs vide their press release dated June 24, 2011.

By virtue of Schedule 5 to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, a SEBI registered Foreign Institutional Investor (FII) and a Non-Resident Indian (NRI) may invest in securities other than shares or convertible debentures, subject to such terms and conditions mentioned therein and limits as prescribed for the same by the Reserve Bank and the Securities and Exchange Board of India (SEBI) from time to time.

AP (DIR Series) Circular No.8 dated August 9, 2011 and AP (DIR Series) Circular No.42 dated November 3, 2011 permits Qualified Foreign Investors (QFIs as defined therein to mean non-resident investors, other than SEBI registered FIIs and SEBI registered FVCIs, who meet the KYC requirements of SEBI) are allowed to invest in units of domestic Mutual Funds.

RBI vide a circular dated November 22, 2011 has permitted investment on repatriation basis by eligible non-resident investors in (i) Rupee and Foreign currency denominated bonds issued by the Infrastructure Debt Funds (IDFs) set up as an Indian company and registered as Non-Banking Financial Companies (NBFCs) with the Reserve Bank of India and in (ii) Rupee denominated units issued by IDFs set up as SEBI registered domestic Mutual Funds(MFs), in accordance with the terms and conditions stipulated by the SEBI and the Reserve Bank of India from time to time.

However these investments would be subject to certain terms and conditions as provided in the Circular.

Click here to view the Circular.

Banks as sponsors to Infrastructure Debt Funds

IDFs can be set up either as Mutual Funds (MFs) or as Non-Banking Finance Companies (NBFCs). While IDF-MFs will be regulated by SEBI (SEBI has amended the Mutual Funds Regulations to provide regulatory framework for IDF-MFs by inserting Chapter VI-B to the MF Regulations), IDF-NBFCs will be regulated by Reserve Bank of India (RBI). The Reserve Bank had also issued a press release on September 23, 2011 which contained the broad parameters for banks and NBFCs to set up IDFs. Click here to view the detailed regulations relating to IDF-NBFCs.

RBI has notified that scheduled commercial banks would be allowed to act as sponsors to IDF-MFs and IDF-NBFCs with prior approval from RBI subject to inter alia the following conditions:

·         Banks may act as sponsors to IDF–MFs subject to adherence to SEBI regulations in this regard.

·         A bank acting as sponsor of IDF–NBFC shall contribute a minimum equity of 30 per cent and maximum equity of 49 per cent of the IDF-NBFC.

·         Investment by a bank in the equity of a single IDF – MF and NBFC should not exceed 10 per cent of the bank’s paid up share capital and reserves.

·         Investment in the equity of a bank in subsidiary companies, financial services companies, financial institutions, stock and other exchanges put together should not exceed 20 per cent of bank’s paid up share capital and reserves and this limit will also cover bank’s investments in IDFs as sponsors.

·         Banks’ exposures to IDFs - (MFs and NBFCs) by way of contribution to paid up capital as sponsors will form part of their capital market exposure and should be within the regulatory limits specified in this regard.

·         Banks should have clear Board laid down policies and limits for their overall infrastructure exposure which should include their exposures as sponsors to IDFs - (MFs and NBFCs).

·         The IDFs - (MFs and NBFCs) should make a disclosure in the prospectus / offer document at the time of inviting investments that the sponsoring bank's liability is limited to the extent of its contribution to the paid up capital.

Click here to view the notification.