On cards: Move to make infra bonds more attractive

Written by Raj Kumar Ray | New Delhi | Updated: Jan 6 2013, 05:41am hrs
The finance ministry is likely to announce in a fortnight a partial guarantee scheme for infrastructure builders to raise funds from the corporate bond market, a move aimed at bolstering the market and speeding up capacity building in roads, ports, power and other sectors critical to propel economic growth.

A special purpose vehicle (SPV) of GMR may get the first such guarantee from state-run India Infrastructure Finance Company Ltd (IIFCL). Many other infrastructure SPVs of companies such as L&T and JP Hydro are also in the fray for similar facility, sources in the know told FE. Bond issues of infrastructure SPVs do not get a favourable rating now. The idea is that a partial guarantee from a reputed financial institution like IIFCL will upgrade these bonds rating to AA and make them eligible for investments by insurers and pension funds.

An announcement on the partial guarantee or credit enhancement facility will be made by either the finance minister or the minister of state sometime between January 15-20, said an official familiar with the development.

Already, IIFCL has sought Asian Development Banks assistance for the credit enhancement facility of up to $12 billion for three years, which will help in completing many long-gestation projects held up due to funding problems. IIFCL chairman SK Goel said the ADB board has approved the proposal and it will be formally communicated soon.

The new initiative is part of the ongoing efforts to reform the bond market to lure more investors, especially foreign sovereign wealth funds, insurance and pension funds to help garner the $1 trillion needed to scale up the infrastructure sector during the 12th Plan.

At a recent meeting of the Financial Stability and Development Council, finance minister P Chidambaram promised to announce more steps for the corporate bond market after discussing it with corporate houses.

Recently, the government and regulators have rolled out a series of steps to improve liquidity and add depth to the corporate bond market, including allowing membership of banks in stock exchanges for trading in corporate bonds, permitting specialised trading platforms for trade in corporate bonds, enabling trading in collateralised corporate bond receipts and creating an enabling framework for cash settlement of trades in corporate bonds.

While Sebi has permitted banks to take limited membership in approved stock exchanges for the purpose of undertaking proprietary transactions in the corporate bond market, Insurance Regulatory and Development Authority has come out with guidelines for participation in the repo market (for both government securities and corporate bonds) by insurance companies to enhance liquidity in the corporate bond markets.

While the government is trying to address the problems of forest clearances and other bureaucratic delays by setting up a nodal agency, a National Investment Board, it has prodded infrastructure financiers like IIFCL to arrange long-term funds and help in the development of the corporate bond market.

With economic slowdown and rising non-performing assets, banks are wary of funding infrastructure projects beyond five-seven years, fearing a mismatch in assets and liability. While this forces infrastructure companies to pile up debt in the initial years, delay in completion automatically makes the project unviable.

Apart from the corporate bond market, the government has also laid down a policy framework for infrastructure development funds, which can be major investors in corporate bonds.