Dedicated core sector funds hit a block

A proposal to allow mutual funds to raise money from retail investors for the infrastructure sector through dedicated infrastructure funds (DIFs) appears to have hit a roadblock.

Reservations expressed by some market participants on exposing retail investors to this product have come as a hurdle to the launch of such funds.

A committee appointed by the Securities and Exchange Board of India (Sebi) under U K Sinha, the chairman and managing director of UTI Mutual Fund, had suggested the creation of a separate structure for DIFs.

The committee had also favoured tax incentives for retail investors.

Replying to a query on the status of the report, a Sebi official hinted that there could be delays on DIFs. "A few days before, we were to put out the draft guidelines. One of the market participants said that there could be a problem in exposing retail investors to the product," the official said on condition of anonymity.

He added that it would be too early for retail investors to invest in such a product and that institutional investors should first be allowed to invest in it for at least two years. However, consultations over the matter were close to an end, the official added.

Sebi appointed the committee on DIF after Finance Minister P Chidambaram, in the Union Budget 2007-08, proposed setting up of dedicated funds by mutual funds to meet the financing requirement of the infrastructure sector.

The committee, in its report submitted on August 7, observed that the proposed DIFs would have to be structured differently from the current mutual fund schemes as they would be required to invest in unlisted companies with longer gestation period.

Milind Barve, managing director, HDFC Mutual Fund, and one of the members of the Sebi panel, said: "It is true that infrastructure projects are long-gestation projects and investing in unlisted space will have a fundamental illiquidity involved. Since it will have a close-ended structure, retail investors cannot get out of the project. So, it is a good thought to initially keep retail investors from such projects in the initial stages."

He further added that the rationale for having institutional investors first was that they possessed a better understanding of these projects because they had already worked or financed them.

"It will be a good beginning and if the proposal is finally cleared, we would like to bring such a product for investors", Barve said.