In this article we will discuss about:- 1. Salient Features of infrastructure Finance 2. Institutional Finance for Infrastructure Sector 3. Take-Out Finance 4. Sources Finance 5. Bonds 6. Differentiated Features 7. SEBI Regulations as to Infrastructure Development Funds (IDFs) 8. RBI Guidelines as to Infrastructure Development Funds (IDFs).
Salient Features of Infrastructure Finance:
Traditionally, government has been the sole financier of infrastructure projects along with being responsible for implementation, operations and maintenance. There is a paradigm shift in recognising that this method may not be the best way to execute/finance such mega projects.
The government has made several attempts to create an environment for sustainable and scalable involvement of the private players in infrastructure development within the country. Though there are certain issues surrounding availability of suitable intermediaries with an adequate amount of risk capital for infrastructure financing, there does not appear to be a shortage of funds per se within the economy.
Typically, infrastructure finance would be for the infrastructure projects depending on manufacturing projects, expansion and modernization projects carried out by infrastructure undertakings in India. Infrastructure finance is highly capital intensive and entails longer maturity with higher risk and prolonged real rate of returns.
Given the issues surrounding supply of risk-free capital and supply of funds, the manner in which these scarce resources can be procured is a very important question. With this constraint, no single entity has sufficient capital to meet large requirements of infrastructure finance in the country by venturing into risk for large number of investors. In order to meet the requirements, development of markets/mechanism for long-term finance becomes imperative and urgent.
Institutional Finance for Infrastructure Sector:
Banks and Financial Institutions (FIs) are open to finance technically feasible, financially viable and bankable projects undertaken by both public and private sector undertakings.
However, before financing, it is pre-requisite to take adequate measure as follows:
1. Funds sanctioned to be within the overall ceiling limits of prudential exposure norms prescribed by Reserve Bank of India (RBI) for infrastructure financing.
2. Banks/FIs should have requisite knowledge for appraising technical viability of the projects.
3. Financing infrastructure projects through term loans, Banks/FIs should conduct due diligence on the viability and bankability of such projects to ensure efficient utilisation of resources and creditworthiness of the projects financed.
4. Banks/FIs may lend to special purpose vehicles in private sector, registered under the Companies Act for directly undertaking financially viable infrastructure projects and not merely acting as a financial intermediaries.
While the aggregate supply of funds does not seem to be in short supply, there is a need for a layer of credit enhancement, which can absorb the risks associated with infrastructure financing. It also gives rise to evolve intermediaries, instruments and markets which can perform functions of risk, maturity and duration transforming to suit the desires of the investors.
Take-Out Finance:
Take-out finance requires, Banks/FIs financing large infrastructure projects through an arrangement with the financial institution by transferring to the latter, outstanding in respect of such financing in their books on a predetermined basis. There are several variants of take-out finance but, basically they are either in the nature of unconditional or conditional take-out finance assuming full or part credit risk.
Primarily, take-out finance products will involve three parties viz.,
i. The project company,
ii. Taking over institution and
iii. The lending Banks/FIs.
Essentially, take-out financing scheme is a mechanism designed to enable banks avoid asset liability maturity mismatch which arise out of extending long tenure loans to infrastructure projects.
The RBI has prescribed guidelines on prudential norms, income recognition and provisioning on take-out finance by financial institutions. IDFC and SBI have devised different take-out financing structures customized to suit the requirements of various banks, addressing issues like liquidity, limited availability of project appraisal skills etc.
In order to sustain high economic growth, India requires large investments in areas like roads, ports, power and telecom etc. Traditionally, government has been the sole financier of infrastructure projects along with being responsible for implementation, operations and maintenance. However, there has been a paradigm shift in recognising that this method may not be the best way to execute/finance such mega projects.
Take-out finance is one of the important modes of financing infrastructure projects, which is an accepted international practice of releasing long-term funds for financing infrastructure projects. It is effectively used to address the asset-liability mismatch of commercial banks arising out of financing infrastructure projects.
Sources of Infrastructure Finance:
The important sources of infrastructure finance in India as shown below:
A. Domestic Sources:
Equity Funds:
1. Domestic investors (independently or in collaboration with international investors)
2. Public utilities
3. Dedicated Government Funds
4. Other institutional investors.
Debt Funds:
1. Domestic commercial banks (3-5 year tenor)
2. Domestic term lending institutions (7-10 year tenor)
3. Domestic bond markets (7-10 year tenor)
4. Specialized infrastructure financing institutions such as infrastructure debt funds
B. External Sources:
Equity Funds:
1. Foreign investors (independently or in collaboration with domestic investors)
2. Equipment suppliers (in collaboration with domestic or international developers)
3. Dedicated infrastructure funds
4. Other international equity investors
5. Multilateral agencies
Debt Funds:
1. International commercial banks (7-10 year tenor)
2. Export credit agencies (7-10 year tenor)
3. International bond markets (10-30 year tenor)
4. Multilateral agencies (over 20 year tenor)
Infrastructure Bonds:
Some bonds have a special provision that allows the investor to save on tax. These are termed as tax-saving bonds, and are widely used by individual investors as a tax-saving tool.
Examples of such bonds are:
1. Infrastructure Bonds under Section 80C of the Income-tax Act, 1961
2. Capital Gains Bonds under Section 54EC of the Income-tax Act, 1961
Infrastructure bonds are available through issues of ICICI and IDBI, brought out in the name of ICICI Safety Bonds and IDBI Flexi Bonds. These provide tax-saving benefits under Section 80C of the Income-tax Act, 1961, for the investor. Deep Discount Bonds are suitable for an increase in investment.
These bonds, which are sold at a discount on their face value, are redeemed at their face value on maturity of the instrument, the difference being gain. Infrastructure bonds do not offer any protection against high inflation since the rate of interest they offer is predetermined, and is not indexed for inflation. One can borrow against infrastructure bonds by pledging them with a bank. The amount depends on the market value of the bond and the credit quality of the instrument.
Although Infrastructure Bonds are considered to be pretty safe, ICICI and IDBI bonds are unsecured instruments. The value of the bond is subject to market forces, if it is to be sold before maturity. One should check the credit rating of such instruments before taking an investment decision.
Since both ICICI and IDBI are considered to be financially healthy institutions, income from bonds issued by these institutions is regular. If the bonds have a Call option, it implies that the issuer has the right to prematurely redeem the bonds if it so desires. Inflation and interest rate movements are the two significant economic factors that play a vital role in the investment decisions of Infrastructure Bonds.
Differentiated Features of Infrastructure Finance:
Features of infrastructure finance are some way differs from normal financing like production, manufacturing or expansion project.
They are:
1. Normally infrastructure finance has long maturity period and it extends to five years or more. For example time to completion a bridge may require more than eight years but once it is completed, its life may be more than hundred years.
2. Infrastructure finance involve larger amount of investment. For example a bridge may require more than one thousands crores.
3. Infrastructure finance always involves higher risk as higher amount and long time period involvement. Prediction of long period situation is more complicated than shorter period. In future, changes may arise in customer preference, technological changes, government policies, environmental issues etc.
4. In this type of investment return is very low at initial stages but with the passing of time returns will increase. Initial cost of the project is very high but maintenance cost is very low comparing to its investment cost.
5. After completion of project to continue/run the project manpower requirement is much low comparing to its investment cost. For example, maintenance and collection of toll tax of a long bridge, very few persons are required.
6. The non-recourse nature, the unique risks of infrastructure development, complexity of arrangement require unique appraisal skills and technique.