With the guidelines on infrastructure debt funds now in place, market participants expect these funds to be launched this financial year. However, they say raising funds through the shallow Indian bond market could be a challenge.
Infrastructure debt funds were introduced to accelerate and increase the flow of long-term funding to infrastructure projects in India at lower interest rates. This, however, may not be easy.
According to the regulations, non-banking finance companies that float infrastructure funds are allowed to raise funds through the sale of bonds, with a maturity period of not less than five years. Currently, the only investors in long-term debts are insurance companies and pension funds. Both these entities would have to await regulatory approvals to start investing in infrastructure debt funds.
According to the Insurance Regulatory and Development Authority (Irda) norms, it is mandatory for insurance companies to direct 15 per cent of their investments towards infrastructure. “If allowed, it would open up new avenues for investing,” said the head (fixed income) of an insurance company. But investing in these instruments would depend largely on the pricing of these bonds, he said.
The guidelines also permit the sale of bonds with maturity periods of five years or above, abroad. “Typically, foreign investors park their funds in one-three years maturity brackets only,” said a bond dealer with a domestic brokerage firm.
Foreign institutional investors (FIIs) can invest up to $25 billion in corporate bonds issued by infrastructure companies, with residual maturity of five years. The FIIs can trade among themselves during the lock-in period of three years. Investment limits and the definition of infrastructure companies would have to be modified to augment the overseas fund flow, the dealer said.
The bond market in India is currently dominated by high rated papers. According to norms, the credit risks associated with the underlying projects would be borne by infrastructure debt funds. “Bonds issued by infrastructure debt funds would have to compete with ‘AAA’ rated papers of public sector units, as well as private sector companies,” said the dealer.
Currently, bonds are issued by infrastructure finance companies like Rural Electrification Corporation, Power Finance Corporation and Indian Railways Finance Corporation to fund infrastructure projects in India. In line with the detailed norms, the credit enhancement of infrastructure debt funds to ‘AA’ level is feasible, said a finance ministry release.