In this article we will discuss about the SEBI regulations and RBI guidelines as to infrastructure development funds.
SEBI Regulations as to Infrastructure Development Funds (IDFs):
In order to augment and accelerate capital funding in the form of long-term debt for Government infrastructure projects and provide a framework for setting up and operating Infrastructure Debt Funds (IDFs), the SEBI has notified an amendment to SEBI (Mutual Funds) Regulations, 1996.
The regulations for IDFs under SEBI (Mutual Fund) Regulations are as follows:
1. Eligibility for Launching an IDF Scheme:
An existing mutual fund may launch an IDF scheme if it has an adequate number of key personnel having adequate experience in the infrastructure sector. MF regulations further provide that an applicant who wishes to launch ‘only’ IDF schemes may be allowed to do so if the ‘sponsor’ or the parent company of the sponsor has been (i) carrying on activities or business in infrastructure financing for a period of at least 5 years, and (b) fulfills a further eligibility criteria mentioned in MF regulations.
2. Structure of IDF Scheme:
This scheme can be either floated as a close-ended scheme with a minimum 5 years maturity period or as an open-ended scheme with a lock-in-period of 5 years with interval periods’ of less than a month. Units issued under any of these schemes to investors have to be listed in a recognized stock exchange. The IDF scheme must have a commitment of minimum INR 25 million from a minimum of 5 strategic investors.
Each strategic investor is required to contribute a minimum of INR 10 million with no one holding more than 50% of the net assets of the IDF scheme. Each unit issued must be of a minimum INR 1 million and can be partly paid at the time of issuance.
For better monitoring, SEBI has recently come out with draft SEBI (Alternative Investment Funds) Regulations 2011 proposing to make it mandatory for all private pools of capital including debt funds and infrastructure equity funds to register with it.
3. Permissible Investments:
It is mandatory for investment of at least 90% of the net assets of the IDF scheme in debt securities or securitized debt instruments of infrastructure companies. They can also invest in projects or special purpose vehicles that are specifically created for the purpose of facilitating or promoting investment in the infrastructure sector.
SEBI has also allowed IDF (MFs) to refinance bank loans for existing and revenue generating infrastructure projects. The remaining 10% of net assets of IDFs are permitted to be invested in equity shares, convertibles including mezzanine financing instruments of both stock listed and unlisted companies engaged in infrastructure or related infrastructure development projects.
Further, there is a cap of 30% of the net assets for investment in debt securities or assets of any single infrastructure company or project or bank loan given in respect of completed and revenue generating infrastructure projects.
However, this limit can extend to 50% upon approval by board of trustees and the asset management company of the scheme. IDFs can invest up to a minimum of 25% of their net asset in listed securities of the sponsor or his associate or group company. Such investments are subject to a prior approval from the trustees and a complete disclosure to investors in this regard.
4. Taxation of IDFs and Valuation of Their Assets:
All incomes accruing to the IDF(MFs) will be exempted from Income tax. MF regulations mandate for a valuation ‘in good faith’ by the asset management company of the assets held by IDF.
5. Disclosures in Offer Document and Transaction by Employees:
MF regulations prescribe that the offer document of an IDF scheme shall contain adequate disclosure to equip investors for making an informed investment decision. These regulations also make it mandatory for the employees or directors of the asset management company or the trustee company to make a disclosure of any transactions done with the investee companies within one month of completion of the transaction to the compliance officer.
RBI Guidelines as to Infrastructure Development Funds (IDFs):
The RBI notified broad parameters allowing banks and non-banking financial companies to set up IDFs. Any investment by banks and NBFCs in IDF schemes will require a prior approval from the RBI. RBI guidelines prescribe various thresholds for investment in trust based IDFs by banks and NBFCs.
Banks acting as sponsors to IDF-MFs will be subject to existing prudential limits on investment in financial services companies and their capital market exposure while NBFCs will need to have at least $ 60 million as net owned funds.
Some of the key features of RBI guidelines are:
1. IDFs setting up as NBFC must have net-owned funds of at least $ 60 million and issue rupee or dollar denominated bonds of minimum 5 years maturity to investors.
2. They should be assigned a minimum credit rating ‘A’ or equivalent of CRISIL, FITCH etc.
3. They are allowed to invest in Public-Private Partnership Projects and post-commercial operation date infrastructure projects.
4. Income of IDFs – NBFC will be exempted from Income-tax and withholding tax on interest payments on the borrowings has been reduced.
5. Insurance and pension funds are one of the key investors as they have long-term resources, but would require regulatory approval before investing in IDFs. As per the current norms of IRDA (Insurance Regulatory and Development Authority), it is mandatory for insurance companies to direct 15% of their investment towards infrastructure.