IIFCL plans forex reserves SPV in London

London has emerged as the most likely choice for setting up the overseas subsidiary of India Infrastructure Finance Corporation Ltd, a government-owned special purpose vehicle (SPV) that was set up recently to finance infrastructure development in the country.

London, a global financial hub, has emerged as the favourite, narrowly edging out Singapore, the tiny but well-placed East Asian business hub.

"A formal decision is likely to be taken soon," said a finance ministry official, adding that the other cities considered were Dubai and Mauritius.

The finance ministry and the Reserve Bank of India (RBI) are finalising the mechanism to invest a small part of India's $250-billion-plus forex reserves in the IIFCL's overseas subsidiary. The company will lend to Indian infrastructure companies for capital expenditure overseas.

Law firm Amarchand Mangaldas, which was roped in to give advice on the venue and the structure of the SPV, submitted its report last month. It did a comparative analysis of the various cities where the SPV could be set up.

"Though it did not pinpoint any particular city, London seems to be the preferred destination. The government will now have to take a final decision," the official said.

The cities were compared on the basis of regulatory environment, taxation issues and protection to investments. "Though the tax in London is a bit high, it is a well-regulated market," said the official.

The law firm has also favoured a preferential share issue structure over the refinance structure for the SPV.

However, the RBI has been insisting on the refinance option. The RBI officials reiterated this in a meeting with the finance ministry on November 21.

However, the finance ministry officials held that the refinance option would not be feasible as it took six to nine months for regulatory concurrence for providing financial guarantee to such entities.

The central bank fears that investing in such an SPV will create a wrong precedence and it will have to deal with more such proposals.

Replying to a question at the recently held Economic Editors' Conference on the use of forex reserves for infrastructure, Finance Minister P Chidambaram had said it was just a matter of time before the proposal was implemented as the decision was taken at the highest level.

The finance ministry officials are worried that it will be an embarrassment for the government if the proposal does not go through.