IIFCL to set up $1-bn infra debt fund via mutual funds by Feb

New Delhi: The India Infrastructure Finance Company (IIFCL) is planning to set up a $1-billion infrastructure debt fund through mutual fund route by the end of February 2012.

Such infrastructure debt funds (IDFs) are expected to address the long-term financing needs of infrastructure projects and fast-track them.

IIFCL Chairman and Managing Director S K Goel said Asian Development Bank and HSBC will contribute 25 per cent each to the fund. The remaining will come from IIFCL (26 per cent), IDBI Bank (14 per cent) and LIC (10 per cent).

IIFCL is looking for more foreign partners to sponsor the fund when its corpus increases. "Initial corpus is $1 billion but we can go on adding to it. One or two partners may not give a sizeable corpus. There is scope to expand it," said Goel.

An IDF can be set up as a trust or as a company. A trust-based IDF is a mutual fund that issues units, while a company-based fund is in the form of a non-banking finance company (NBFC) issuing bonds. While mutual funds are regulated by Sebi, NBFCs are regulated by RBI.

The state-run infrastructure financing arm was planning to use NBFCs to launch the fund; but later opted for the mutual fund route because "Sebi guidelines are more flexible".

India needs $1 trillion of investment in infrastructure in the XII Five-Year Plan.

Finance Minister Pranab Mukherjee had, in the 2011-12 Budget, announced setting up of IDFs to accelerate and enhance the flow of long-term debt to infrastructure projects for funding the government's infrastructure development programmes.

Infrastructure projects, given their long pay-back period, require long-term financing to be sustainable and cost effective. However, banks, the main source of funding these projects, are unable to provide long-term funding given their asset-liability mismatch. Moreover, banks are also approaching their exposure limits.

Infrastructure debt funds are expected to provide long-term low-cost debt for infrastructure projects by tapping into savings such as insurance and pension funds. By refinancing bank loans of projects, IDFs are expected to take over a fairly large volume of the bank debt that will release an equivalent volume for fresh lending to infrastructure projects. IDFs may also help accelerate the evolution of a secondary market for bonds, which is lacking depth.