India to set up debt fund to finance infrastructure

June 24th, 2011 - 3:45 pm ICT by IANS  

Pranab Mukherjee New Delhi, June 24 (IANS) India will soon set up a debt fund to facilitate financing of long-term infrastructure projects. The government said Friday it has finalised the broad structure of the fund that would be set up either as a trust or a company.

“Infrastructure debt fund is a novel attempt to address the issue of sourcing long-term debt for infrastructure projects,” the finance ministry said in a statement.

After consultations with potential investors, infrastructure companies, regulators and experts, the finance ministry has finalised the broad structure.

As per its draft, the proposed fund would be set up either as a trust or as a company.

A trust based infrastructure debt fund (IDF) would normally be a Mutual Fund that would issue units while a company based fund would normally be a form of non-banking financial company that would issue bonds.

Finance Minister Pranab Mukherjee had Feb 28 announced in the budget for this fiscal (2011-12) the setting up of debt funds through special purpose vehicles to attract foreign investments in various infrastructure projects.

To attract off-shore funds into IDFs, Mukherjee had also announced that tax on withheld interest payments on the borrowings by the IDFs would be reduced from 20 percent to 5 percent. Income from the IDFs is also proposed to be exempted from income tax.

“The structure of IDFs would be closely reviewed for its efficacy and further refinement. RBI will issue regulations for setting up of IDFs on the company route,” the statement said.

India aims to invest over $1 trillion on infrastructure projects during the 12th Plan period (2012-17) as against the estimated $500 billion during the current plan period.

Infrastructure projects, given their long pay-back period, require long-term financing in order to be sustainable and cost effective. However, banks which have been the main source of funding these projects are unable to provide long-term funding given their asset-liability mismatch.

IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of savings like Insurance and pension funds which have hitherto played a comparatively limited role in financing infrastructure.

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