Investment opportunities in infrastructure debt funds

1. Investment opportunities in infrastructure debt funds

2. Introduction • Indian infrastructure sector is becoming an increasingly popular investment avenue. Given government’s ‘Make in India’ initiative coupled with the ‘Housing For All’ initiative, the sector is set to benefit the most. Moreover, with the government increasing its spend allocation for the sector, prospects for the sector have brightened, making it a promising investment avenue. Infrastructure Debt Funds (IDFs) are a significant play on the performance of the sector, since they invest in the growth story of the Indian infrastructure sector.

3. Following are five major reasons for considering investing in infrastructure debt funds: • A vehicle for channelizing investment into the Indian infrastructure sector • IDFs can invest in more projects owing to fresh tax breaks • Gaining traction as an alternative fund source to banks • Easy to set up • IDF-NBFCs possess powerful credit ratings.

4. A vehicle for channelizing investment into the Indian infrastructure sector • One of the major characteristics that makes IDFs a lucrative investment avenue is the fact that they actas investment vehicles for channelizing valuable investment into the Indian infrastructure sector. IDFs in India are sponsored by commercial banks and NBFCs, which allows local as well as offshore institutional investors such as insurance and pension funds to invest in them through the units and bonds issued by the IDFs. The RBI states that IDFs are a potentialtool for refinancing the existing debt of Indian infrastructure companies.This would createthe all-important fresh headroom for banks to extend more lending help to new infrastructure projects.

5. IDFs can invest in more projects owing to fresh tax breaks • Government of India has introduced fresh tax breaks for IDFs that are set up under the NBFC route. Therefore,these fresh tax breaks will allow these IDF-NBFCs to invest in more non-PPP projects in addition to the PPP projects. Due to the widened scope of tax exemption, IDF-NBFCs can also invest more in projects with minimal government participation and in sectors where there are no project authorities.

6. Gaining traction as an alternative fund source to banks • Given the slowing rate of bank lending to the infrastructure sector, IDFs can be a refreshing new alternative source of funds for Indian infrastructure companies. IDF-NBFCs such as L&T IDF, India Infradebt, and IDFC IDF have set a successful precedent for other IDFs to follow. These funds have grown their asset base in 2017 to more than Rs. 9000 Cr from about Rs. 600 Cr in 2015, in just a span of two years (Source: BL).

7. Easy to set up • It is easy to set up an IDF in India either by opening it as a Trust or by registering it as a company. Trust-based IDFs are normally mutual funds issuing units to investors,and are regulated by SEBI. IDF opened through the NBFC route by issuing bonds to its investors is an example of a company-based IDF. Currently, there are three IDFsset up through the NBFC route with a cumulative asset base of more than Rs. 9000 Cr and three through the mutual fund route withcumulative asset base of more thanRs. 2,000 Cr.

8. IDF-NBFCs possess powerful credit ratings. • When IDFs are opened through the NBFC route, they issue bonds to their investors, which need to have a credit rating from a credible institution. These credit ratings such as AAA and A+ help long-term investors such as pension funds and provident funds to make well-informed investment decisions.

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