Infra funds to get a push with escrow first charge

Written by Raj Kumar Ray | New Delhi | Updated: Dec 6 2012, 09:33am hrs
In a bid to attract long-term debt to time-consuming road projects, the government is set to give infrastructure debt funds (IDFs) designated to refinance bank loans to such projects the facility of first charge on escrow accounts of terminated projects. The finance ministry has also stipulated that bonds issued by a concessionaire to an IDF to raise funds for a project must be redeemed well in advance of the completion of the concession period half the amount after completion of 75% of the period, three-fourths by 85% and the remainder no later than two years before the concession period expires.

The new model tripartite agreement between the National Highways Authority of India, the road builder and IDFs also bestows on these funds the title of senior lender and gives them all rights and privileges as enjoyed by the lead bank. The moves are aimed at encouraging banks and financial institutions to launch IDFs, which are expected to play a key role in addressing the asset-liability mismatch between available bank funds and road projects where funding is required for long periods, as much as 25 years in some cases. IDFs help free up bank funding for newer projects.

According to a finance ministry notification, The authority (NHAI) shall, instead of depositing the termination payment in the escrow account of the project, redeem the bonds by making payments due and payable to the debt fund, and the balance, if any, shall be paid into the escrow account.

Hobbled by land and forest clearance issues, several long-gestation road projects have failed to meet deadlines while some have missed revenue targets. With banks turning wary of lending to such projects, companies have been avoiding them of late.

Domestic and foreign lenders want clarity on IDF rules before putting money into infrastructure, a sector estimated to require $1 trillion in five years.

In March, ICICI Bank joined Bank of Baroda, Citi and Life Insurance Corporation to float an IDF with a $2-billion corpus, while IIFCL roped in IDBI Bank, LIC, ADB, Barclays and HSBC for a $1-billion IDF. Many more are in the pipeline.

While ensuring prompt payment to bondholders, the government has capped the overall exposure of IDFs in road projects to 85% of the total debt component of the project. The concessionaire can issue additional bonds not more than 15% of the total debt with prior NHAI approval.

The tenure, interest rate and other commercial terms of bonds must be determined by mutual agreement between the IDF and the concessionaire. The bonds must be in denomination of Rs 1 lakh each or up to Rs 10,000 each. The IDF and the concessionaire may allocate and bear the foreign exchange risks on bonds sold overseas.

Any delay in repayment of principal or interest for and in respect of the bonds shall attract interest at a rate of 3% above the rate of interest applicable for the bonds, the notification said.

IDFs can sell off bonds of the concessionaire to any other person without any notice if these are listed in any recognised stock exchange. IDFs can also extend a term loan to the concessionaire for an amount not exceeding 50% of its total exposure to the concessionaire and such a loan will be treated like a bond.

The tripartite agreement will cease if the company opts for early bond redemption.