IDF being a pass-through vehicle is easily workable if set up as a trust. However, since a trust cannot issue bonds or undertake credit enhancement and cannot get withholding tax benefits, an IDF would also have to be allowed as a company, the ministry said in a statement.
An IDF would be regulated by the Reserve Bank of India if set up as a company, while it would be under the control of the Securities and Exchange Board of India if formed as a trust, the statement said.
As a company, the IDF could be set up by one or more sponsors, including NBFCs, IFCs or banks, and would be allowed liberal prescription of risk-weightage (50% instead of 100%), net owned funds (minimum Tier I equity of R150 crore) and exposure norms (not as a percentage of net-owned funds), it added.
It would raise resources through the issue of either rupee or dollar-denominated bonds of minimum five-year maturity, which would be tradeable among equivalent (domestic vs foreign) investors. It would invest in debt securities of only PPP projects which have a buy out guarantee and have completed at least one year of commercial operation.
Refinance by the IDF would be up to 85% of the total debt covered by the concession agreement and senior lenders would retain the remaining 15% for which they could charge a premium from the infrastructure company, it said.
The IDFs were proposed in the Budget for 2012-13 fiscal by then finance minister Pranab Mukherjee and aimed at meeting the financing needs of the infrastructure sector, considering financing by banks doesn't suffice for the long-gestation projects of the sector. The credit risks associated with the underlying projects will be borne by the IDF.
Potential investors will include the more risk averse off-shore institutional investors, off-shore High Net-worth Individuals (HNIs), NRIs and domestic institutional investors. Credit enhancement of IDFs to AA level with the above investment restrictions is feasible.