Introduction through the spurt in growth in the manufacturing

Introduction and
Problem Identification



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                  Post 1991(liberalization), our country has seen
tremendous growth in its GDP through the spurt in growth in the manufacturing
and service sectors owing to the influx of foreign players. This along with the
rise in population and growth in the economy has increased the purchasing power
of the country’s population. The increase in per capita income of the people,
the rise in manufacturing output coupled with other factors has put enormous
pressure on the country’s ageing and inadequate infrastructure. The need for
extensive investments in the infrastructure sector was felt by the government
as it was proving to be a major hindrance towards economic growth.
Infrastructure also has a cascade effect on other sectors of the economy as it
increases or decreases their productivity and creates or eliminates bottlenecks.
But, to address the serious lack of infrastructure in the country, the
government, with its limited funds alone would not be able to meet the
requirements. Hence, a need was felt to source financing support from private
parties to plug the gap. As a requisite to this, the cap on foreign direct
investment in the infrastructure sector was partially lifted to lure foreign investors
to invest in India which had by the late 90’s become a very lucrative investment
destination. This laid the foundation of the increased penetration of private investment
in the Indian infrastructure sector. As on 2012, the FDI on infrastructure
sector alone was $386.28 million. Realizing the fruits and the huge potential
in infrastructure growth through private investment, the government of India
has completely lifted the cap on FDI on select infrastructure sub-sectors like Greenfield
airports, ports, harbors, roads and highways and mass rapid transit systems.


Review of
Infrastructure Debt Funds


vehicle for the funneling of private investors and other bank and non-bank
financial institutions to fund infrastructure projects is known as the IDF
(Infrastructure debt funds). This would be sponsored by banks and non-bank
financial institutions. Sponsorship, in this particular context essentially
means a participation by the bank or NBFC in the equity of the IDF in a range
of 30%-49%. In these IDF’s, offshore investors especially insurance companies
and private investors can participate by investing in units and bonds given out
by these IDFs. An IDF can be setup as a company or maybe as a trust in some
cases. If the IDF is setup as a trust then it would be rolled out as a mutual
fund or an IDF-MF which will be regulated by SEBI and in which any bank or NBFC
can invest. On the other hand, if the IDF is setup as company, it will be
called as an IDF-NBFC which only banks and infrastructure finance companies can
invest in. In this case, the IDF is regulated by RBI. The route that IDF
vehicles take to execute infrastructure projects is the Public, Private
Partnership route (PPP). PPPs can be simply defined as contracts (usually long
term) signed between a public authority like NHAI and a private party like GMR,
GVK, L&T etc. where the private party executes a project or service of
interest to the public party (e.g. building national highways etc.). The
government supports the capital investment partly or through provision of
capital subsidies to the private player so that the project becomes
economically lucrative for them. In further detail, some projects may also be
signed on the BOT (build, operate, transfer) model where the private party
takes responsibility of execution of the project and its operation for a
stipulated period of time forth which the project is handed over to the
government. The RBI has chalked out certain criteria for the sponsors of IDFs
and the investors in such IDF-MF/NBFC. The sponsor of the IDF has to sign a
tripartite agreement with the concessionaire and the project authority to participate
in a particular PPP project. This would bind all the three parties and provide
a consensus for the following:

IDF and the project authority mutually agrees on a fee that the IDF has
to pay the project authority.

Any default by the concessionaire shall lead to the termination of the
existing agreement between the concessionaire and the project authority.

The IDF shall take over a part of the debt of the concessionaire.

The project authority can redeem the bonds by the IDF to fund the
project. Essentially, what this means is that the IDF gains stake in the
project due to lending financial support to the project authority. This is
referred to as a compulsory buyout. Thus, this means that the IDF also takes up
the risk as well as the benefits associated with the project.


short, Infrastructure Debt Funds is a successful vehicle for funding
infrastructure projects in India. As per the RBI and the union finance
ministry, the main purposes of IDFs are to supplement lending for
infrastructure projects and act as a tool for the refinancing debts incurred by
the private player for the project which were previously funded by commercial


Advantages of IDFs


has helped in accelerating the execution of PPP infrastructure projects in
India. The main hindrance was because of the inability of the banks to sanction
loans to the private players due to the high asset liability mismatch. For a
mammoth infrastructure project, a huge loan requested by a private party
required a huge collateral of some form or other that needs to be produced to
the bank as a guarantee. This was often a challenge. Through IDF which issues
bonds, credit enhancement which is an attribute of the PPP projects is present.
This lowers the credit risk significantly and leads to a higher credit rating.
If the IDF issues units then the credit risk will be borne by the investors
participating in the IDF. Consequentially, the investors can also seek higher
returns owing to the risk borne by them.

other benefit of IDF is its refinancing strategy. This essentially means an IDF
taking over the debt issued by a commercial bank on an ongoing project. By
taking over huge volumes of banks loans, IDFs are essentially opening up
similar volumes of capital with banks for fresh lending to other new
infrastructure projects. This further accelerates the infrastructure growth of
the nation.


Analysis in Indian
and Global Context


financing of infrastructure projects is a fairly new phenomenon in India. The
regulations for the same were rolled out SEBI and RBI in late 2011 and the
first such IDF was formed by a contingent of banks under an MoU. The effects of
the IDF on Indian infrastructure growth needs to be analyzed post 2012-2013.

FDI inflows on the construction(infrastructure) sector alone on the year
2012-13 was $283.89 million. Over the years, this number has risen
exponentially to reach $4.57 billion in 2015-16. This is an increase of 15 times
in a span of just 4 years. Thus, it can be concluded that the commencement of
the IDF as a vehicle for financing infrastructure projects has certainly led to
the increase in foreign direct investment in the sector. This has led to the
launch of more and more projects by the project authorities like NHAI, Shipping
and others and the influx of FDI is only expected to rise in the coming years.
Also, speaking in terms of proportion, the share of Infrastructure sector in
FDI was only a meager 1.2% in 2012-13. Compared to this, in the year 2015-16 it
was a stellar 11.2% of the total FDI. This shows that infrastructure has become
a lucrative sector for investment in India and more and more players are
investing in infrastructure. Apart from this, the national clean energy and
environment fund is another infrastructure fund to finance innovation and
development projects on clean energy. The government of India has been raising
this fund through a cess on the production of coal in India. The funds collected
are being used for green projects across the country and improve the level of
research and development in the renewable energy sector.