Vinayak Chatterjee: Long-term funds for infrastructure

The time has come to implement a bunch of fresh initiatives.

Almost all discussions in the infrastructure space have focused on four key areas. They are:

Setting out a national agenda and game-plan.

Creating a shelf of bankable projects.

Creating independent and autonomous regulatory authorities.

Organising long-term funds.

The first has been largely addressed with the Planning Commission's Consultation Paper titled "Projections of Investment in Infrastructure during the Eleventh Plan", that was circulated in October 2007. (A critique of this appeared in Infratalk on Nov 19.) Issues and expectations relating to a 'shelf of projects' have been discussed in the Infratalk dated Oct 15. The shocking lack of attention to neutral, independent regulatory authorities has been repeatedly documented in this newspaper by Sunil Jain through a series of incisive exposés.

Fresh thinking on long-term funds and an agenda for action are ably captured in the recommendations of two committees, both set up by the finance ministry. One is the 'Report of the Committee on Infrastructure Financing', popularly called the Deepak Parekh Committee Report. Its Report was submitted in May 2007.

The other, more specific, one was the report and recommendations of the Committee on the 'Launch of Dedicated Infrastructure Funds (DIFs) by Mutual Funds'. This report was submitted in July 2007 and the Committee was chaired by U K Sinha, Chairman and Managing Director of the UTI Asset Management Company. Let us call the first DPCR (Deepak Parekh Committee Report) and the second SCR (Sinha Committee Report).

The DPCR has suggested seven broad initiatives. They are:

Development of the domestic debt market.

Tapping the potential of the insurance sector.

Rationalising banks' and NBFCs' participation in infrastructure financing.

Fiscal recommendations

Facilitating equity flows into infrastructure.

Inducing foreign investments into infrastructure.

Utilising foreign exchange reserves.

A deeper dive into each of these seven suggestions is well worth the effort.

Development of domestic debt market
This has some key recommendations:

Consolidation of all regulations pertaining to the issuance of corporate debt securities under the aegis of Sebi to minimise the multiplicity of regulators.

Removal of TDS on corporate bonds in line with GoI securities.

Reduction and uniformity in stamp duty on the issuance of debt instruments and securitisation transactions.

As things stand, none of the key suggestions have been implemented or are under implementation. The popular perception of financial sector watchers is that turf battles between the finance ministry and the RBI are delaying this.

Tapping the potential of the insurance sector
An IRDA committee is apparently examining the issues regarding the investment policy of insurance companies to bring them in line with global best practices.

Enhancing the participation of banks, FIs and large NBFCs
The slew of suggestions here relate to fostering securitisation transactions, modifying NBFCs' exposure norms and rationalising the exposure norms of financial intermediaries. Here, the DPCR also urges allowing banks, FIs and NBFCs to raise foreign currency borrowings for on-lending to the infrastructure sector. No light at the end of this tunnel in the here and now!

Fiscal recommendations
The broad thrust here relates to exempting foreign borrowings by infrastructure companies or project SPVs from withholding tax requirements, and the rationalisation of dividend distribution tax as the infrastructure development business often entails a multi-tier corporate structure. The DPCR also advocates that the unlisted equity capital of infrastructure companies (operating or holding company) should get the same tax treatment as listed equity investments, as private (read unlisted) equity would be the dominant source of equity capital in this sector.

For forward movement in this area, many are awaiting glad tidings in the finance minister's Budget speech next February.

Facilitating equity flows into infrastructure
Suggestions here relate to liberalising buyback regulations from initial vendor/supplier/contractor placements, replacing initial bidders with new partners and having Sebi-registered venture funds/PE funds as bidding partners. Recent newspaper reports point to a positive attitude developing in the finance ministry in allowing some of these to happen.

Inducing foreign investment into infrastructure
The idea here is to ensure that FII limits get better utilised to attract genuine long-term investors as opposed to arbitrage traders, provide separate treatment for infrastructure holding companies vis-à-vis FDI and ECBs, and allow refinancing through ECBs. The RBI-finance ministry equations will have to be played out here too.

Utilising foreign exchange reserves
It was recently reported in Business Standard (Nov 22) that "in a meeting in New Delhi on Wednesday, Nov 21, RBI Deputy Governor Shyamala Gopinath rejected the finance ministry's proposal to invest in the proposed overseas subsidiary of India Infrastructure Finance Company Ltd (IIFCL) and reiterated that the central bank would only refinance the loans by the IIFCL subsidiary. The RBI fears that agreeing to invest in such a special purpose vehicle will set a wrong precedent."

Anyway, some $5 billion of forex is apparently earmarked for this purpose.

Dedicated infrastructure funds
The SCR's brief was a far more focused one. In the 2007 Budget speech, the finance minister had mentioned the need to promote the flow of investment to the infrastructure sector by permitting domestic mutual funds to launch and operate dedicated infrastructure funds.

The SCR seeks to address issues related to the implementation of this idea. It has provided some clear and pointed recommendations. Fundamentally, the SCR postulates that dedicated infrastructure funds (DIFs) should operate as close-ended schemes with a maturity period of seven years. They should get listed within 24 months of the launch. DIFs may be allowed to invest up to 100 per cent of their funds into unlisted securities, including both debt and equity instruments. They can look to exit the investments through strategic sale, IPOs or buyback agreements. DIFs can be launched by all Sebi-registered AMCs and that all individuals/companies/corporates/institutes and FIs should be eligible for making investment in such mutual funds. The SCR also believes that it is extremely important to provide some tax incentives to retail investors to motivate them to invest in DIFs and then goes on to suggest the desired tax benefits.

It is understood that Sebi has forwarded its recommendations to the finance ministry. As there are revenue-related implications, they are currently under review by the department of revenue. Infrastructure watchers are hopeful that a formal announcement will be made by the finance minister shortly.

Before winter turns to spring 2008, we await pointers on implementation.

The author is the Chairman of Feedback Ventures. He is also the Co-Chairman of CII's National Council on Infrastructure. The views expressed are personal