After scaling up the infrastructure investment target to $1 trillion for the 12 th Plan, the government now proposes to take a series of steps to channel long-term funds to the sector. A step being mulled is a special dispensation for FIIs wanting to invest in infrastructure bonds; a higher limit would be set for them above the $15-billion ceiling on foreign investment in corporate bonds. Greater flow of foreign money into the bond market on the back of India?s aggressive infrastructure investment plans is also expected to spur the development of a secondary market for bonds, a key policy objective for quite some time.
Further, bonds floated by banks to raise funds for infrastructure lending would be exempt from SLR and CRR (statutory liquidity and cash reserve ratios) requirements. The exemption would partly address the issue of asset-liability mismatch faced by banks on their exposure to infrastructure projects and also ease the constraint in raising long-term resources, according to official sources.
The current limit of FII investment in corporate bonds is not fully used up. The government, however, reckons that the scenario would change in the coming months, given the strength of the Indian infrastructure story that is still to unravel. The assessment is that cash-rich FIIs would find infrastructure bonds issued by Indian firms attractive. FIIs investing in infrastructure projects would face a ?natural lock-in? in the absence of buyers during the construction phase of the project, an official said.
Finance minister Pranab Mukherjee said at a function here earlier this week that apart from public sector entities like NHAI, REC and IIFCL, private firms would also be allowed to issue tax-free infrastructure bonds.
The government also wants to clearly define the role of India Infrastructure Finance Company Ltd (IIFCL), its special purpose vehicle for addressing the paucity of compatible funds for infrastructure projects in many sectors. The idea is that as a lender of last resort (rather than yet another primary financier), IIFCL would be empowered to give an assurance on take-out financing to infrastructure firms even before they approach primary financiers.
Under the take-out financing model, IIFCL would guarantee that it would step in and buy from banks their loan assets at a later point, in order to address the mismatch between the long-term resource needed for infrastructure projects and the tenure of bank loans. The facility would come handy to borrowers since they would get long-term funds without negotiating with the lenders again, says Jai Mavani, head, real estate and construction, KPMG.
Although the finance minister had announced as early as in the Budget 2009-10 that IIFCL would chalk out a take-out financing scheme, the facility has not fructified. It is reckoned that a prior-guarantee model would help kick-start the model. Even the refinance window with IFFCL is yet to make a visible change on the ground, although the company has mobilsed Rs 10,000 crore towards this through tax-free bonds.
Under this window, banks can take out fresh loans from IIFCL at an interest rate of 7.85% to finance their loans for infrastructure projects. Banks raise finance at much higher rates, usually above 8%, to lend. The government?s optimism on FII interest in infrastructure bonds stems from the estimated 9% GDP growth rate in the 12th Five-Year Plan that would bolster the commercial viability of infrastructure projects in the country. In many sectors such as ports and national highways, companies have already bagged BOT projects by offering a premium to the government, a development that heralds the redundancy of government grants to (viability gap funds) core sector projects.