No investment in IIFCL foreign arm: RBI

Despite the law ministry clearance for investing forex reserves in the overseas subsidiary of India Infrastructure Finance Company (IIFCL), which is meant to provide easy funding access to domestic infrastructure companies, the Reserve Bank of India (RBI) has rejected the proposal, announced by the finance minister in his Budget speech.

Reiterating its earlier view, the RBI, in a letter to the finance ministry, has said while refinancing loans by the IIFCL's overseas subsidiary is feasible and can be implemented with ease, buying its securities is against its current policy.

The RBI has suggested that the subsidiary should borrow from the market, which the bank will refinance. However, the finance ministry feels the subsidiary will not be viable if it borrows from the market. "It will be just another overseas fund," said a finance ministry official.

To meet the huge infrastructure requirement of the country, the finance ministry wants the RBI to invest a small part of its over $256 billion forex reserves in the overseas subsidiary of IIFCL, which will lend to Indian infrastructure companies for overseas capital expenditure.

Section 17 (13) of the Reserve Bank of India Act, under which the finance ministry had sought the central bank's investment, is for deployment of forex reserves by the RBI in a "foreign institution" and not in a government-owned arm.

"In any case, the issue is not just the legality of the investment. The substantive issue is whether a wholly-owned subsidiary of an Indian company, owned by the government, will meet the criteria for qualifying as a 'foreign institution,' as is the intent of the Section," the RBI has said.

The RBI has held that as a matter of practice, it only invests in supranational financial institutions that have AAA rating.

"Such institutions either have explicit guarantee of the foreign government concerned or are owned by foreign governments," it held.

The government recently decided that the forex reserves that would be used for infrastructure spending via the IIFCL subsidiary would not be treated as external commercial borrowings.