The idiom Debt Fund is commonly understood as an investment pool, which invests in debt securities of the companies. It holds the assorted fixed-income instruments such as bonds or debentures. The Infrastructure Debt Fund Non-Banking Financial Companies or IDF-NBFC is a non-deposit accepting financial institutions, which deals in pervading long-term debt into the infrastructure sector. IDF is not a Scheme driven by a mutual fund or such other organizations but to the Company or Trust who is investing in debt securities. An IDF can float a range of Schemes for financing infrastructure projects. They act vehicles for maneuvering the investment sector. They are being financed by the commercial banks and NBFCs in India in which conjugal institutional investors, especially insurance and pension funds can invest by the way of units and bonds endowed by the IDFs. The IDFs can be set up either as a trust or as a company. A trust based IDF would normally be mutual fund, synchronized by SEBI, while a company based IDF would usually be an NBFC synchronized by the Reserve Bank of India (RBI).
Thus, there are two kinds of IDFs:
The IDF – MFs can be sponsored by banks and NBFCs. Whereas the IDF – NBFCs can be financed by banks and Infrastructure Finance Companies. Sponsorship means equity involvement by the NBFC between thirty to forty nine percent of the IDF.
IDF is an initiative to deal with the problem of procuring long term debt for infrastructure projects in India. The Union Finance Minister had talked about setting up of IDFs to accelerate and enhance the flow of long term debt in infrastructure projects in his speech. The main objective of IDFs is
The NBFCs that are financing the IDF – MFs are required to comply with the following necessities –
The existing Infrastructure Finance Company NBFCs can also sponsor IDFs only if they meet the conditions for the same.
Investors in IDFs would mainly be conjugal and off-shore institutional investors, particularly Insurance and Pension Funds who have long term funds. Banks and Financial Institutions would only be permitted to invest as sponsors / promoters of an IDF subject to certain circumstances. To draw funds, an exclusion from income tax for IDF has been provided and also the withholding tax has been reduced to five percent from twenty percent on the interest payment on the borrowings of IDFs.
An IDF-MF would elevate funds through issue of rupee denominated units of minimum 5 year maturity that would be listed in an acknowledged stock exchange and tradable among investors. It is compulsory for the IDF – MF to invest minimum ninety percent of its assets in the debt securities of infrastructure companies or SPVs across all infrastructure sectors, project stages and project types. Excluding the management fees, the returns on assets of the IDF will pass through to the investors directly. The credit risks linked with the core projects will be borne by the investors and not by the IDF. This structure is focused on the investors that are risk-taking. An IDF Scheme can be launched by an existing mutual fund too.
An IDF-NBFC would raise resources by publicizing of either rupee or dollar-denominated bonds of minimum five year maturity, which would be tradable among investors. It would just deal in the debt securities of Public-Private Partnership that have a solicit assurance (Solicit assurance implies required buyout by the Project Authority [which refers to the government organization who is inward bound into a concession agreement with the private party or who is giving the contract ] in the occurrence of termination of Concession Agreement) and have accomplished at least one year of commercial operations. Refinance (fundamentally means replacing an older loan issued by a financial institution with a new loan presenting better terms) by IDF would be up to eighty five percent of the total debt covered under the allowance agreement. The senior lenders would hold the remaining fifteen percent for which they could indict a premium from the infrastructure company. Here, the credit risks allied with the core projects will be handled by the IDF. This structure is focused on investors who are risk-reluctant.
One of the main issues faced by the banks while distributing loans to infrastructure projects is the asset liability variance inherent with these projects. Therefore many such projects are deprived of financing by banks. An IDF that gives bonds, credit enhancement inherent in Public Private Partnership projects would be available. Such projects would involve risk on a lower level and then a higher credit rating. An IDFs that issues units, the investors would bear greater credit risk and will be free to seek correspondingly higher returns. MFs would be especially useful for non-PPP projects. The IDFs by refinancing bank loans of existing projects are expected to take over a large volume of the existing bank debt that shall discharge an equivalent volume for fresh lending to infrastructure projects. Thus, IDFs are expected to steer the long-term low cost resources of Provident Fund/Insurance/Pension Funds for infrastructure financing. The IDFs are also targeted to help accelerate the evolution of a secondary market for bonds that is presently lacking in sufficient depth.
According to the regulations issued by RBI, a Tripartite Agreement will be entered among the Concessionaire, the Project Authority and the IDF which shall be binding on all the parties thereto, has been approved to smooth the progress of early operationalization of the Infrastructure Debt Funds.
The very first IDF that was prearranged as an NBFC , with the ICICI Bank, Bank of Baroda, Citicorp Finance India Limited and Life Insurance Corporation of India was launched on March 5, 2012 entering into a Memorandum of Understanding.
Non-Banking Financial Company (NBFC) is that kind of financial institution which offers various financial and non-financial services to business enterprises, individuals, entrepreneurs, etc. NBFC License must be taken from RBI
Peer-to-peer lending platforms offers a simple key to borrow money for short-term necessities. This shall include buying consumer electronics, medical emergency, business loan, home renovation, repay credit card dues, travel loan, or any other such requirements.
The procedure for taking over an NBFC is being laid down by the RBI. Takeover of an NBFC refers to purchase of one NBFC by another company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.
NBFCs do not have those prosperities, which means that the NBFCs need alternate sources of the money supply, which are higher than the deposits taken by banks, where the interest rate offered is between 4%-6%.
Collaboration means coming together for a shared goal. India has more than 9000 active NBFC but barely 954 the NBFCs have book size more than 40 crores. Rest 8460 NBFCs are only able to meet the regulatory cap of the loan book of INR twenty Million.
RBI and other related regulators set rules and regulations, which keep on altering because of changing needs and circumstances. It is important for the NBFC management to know about what to do and how to do it, and there is a strong need to keep abreast of the times.
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