Problem this, the cap on foreign direct investment in



                Post 1991(liberalization), our country has seen
tremendous growth in its GDP through the spurt in growth in the manufacturing
and service sectors owing to the influx
of foreign players. This along with the rise in population and growth in the
economy has increased the purchasing power of the country’s population. The
increase in per capita income of the people, the rise in manufacturing output
coupled with other factors has put enormous pressure on the country’s ageing
and inadequate infrastructure. The need for extensive investments in the
infrastructure sector was felt by the government as it was proving to be a
major hindrance towards economic growth. Infrastructure also has a cascade
effect on other sectors of the economy as it increases or decreases their
productivity and creates or eliminates bottlenecks.
But, to address the serious lack of infrastructure in the country, the
government, with its limited funds alone would not be able to meet the
requirements. Hence, a need was felt to source financing support from private
parties to plug the gap. As a requisite to this, the cap on foreign direct
investment in the infrastructure sector was partially lifted to lure foreign investors
to invest in India which had by the late 90’s become a very lucrative investment
destination. This laid the foundation of the increased penetration of private investment
in the Indian infrastructure sector. As on 2012, the FDI on infrastructure
sector alone was $386.28 million. Realizing
the fruits and the huge potential in infrastructure growth through private
investment, the government of India has completely lifted the cap on FDI on
select infrastructure sub-sectors like Greenfield airports, ports, harbors,
roads and highways and mass rapid transit systems.

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Review of
Infrastructure Debt Funds


vehicle for the funneling of private
investors and other bank and non-bank financial institutions to fund
infrastructure projects is known as the IDF (Infrastructure debt funds). This
would be sponsored by banks and non-bank financial institutions. Sponsorship, in
this particular context essentially means a participation by the bank or NBFC
in the equity of the IDF in a range of 30%-49%. In these IDF’s, offshore
investors especially insurance companies and private investors can participate
by investing in units and bonds given out by these IDFs. An IDF can be setup as
a company or maybe as a trust in some cases. If the IDF is setup as a trust
then it would be rolled out as a mutual fund or an IDF-MF which will be
regulated by SEBI and in which any bank or NBFC can invest. On the other hand,
if the IDF is setup as company, it will be called as an IDF-NBFC which only
banks and infrastructure finance companies can invest in. In this case, the IDF
is regulated by RBI. The route that IDF vehicles take to execute infrastructure
projects is the Public, Private
Partnership route (PPP). PPPs can be simply defined as contracts (usually
long term) signed between a public authority like NHAI and a private party like
GMR, GVK, L&T etc. where the private party executes a project or service of
interest to the public party (e.g. building national highways etc.). The
government supports the capital investment partly or through provision of
capital subsidies to the private player so that the project becomes
economically lucrative for them. In further detail, some projects may also be
signed on the BOT (build, operate,
transfer) model where the private party takes responsibility of execution
of the project and its operation for a stipulated period of time forth which
the project is handed over to the government. The RBI has chalked out certain
criteria for the sponsors of IDFs and the investors in such IDF-MF/NBFC. The sponsor
of the IDF has to sign a tripartite agreement with the concessionaire and the
project authority to participate in a particular PPP project. This would bind
all the three parties and provide a consensus for the following:

IDF and the project authority mutually agrees on a fee that the IDF has
to pay the project authority.

Any default by the concessionaire shall lead to the termination of the
existing agreement between the concessionaire and the project authority.

The IDF shall take over a part of the debt of the concessionaire.

The project authority can redeem the bonds by the IDF to fund the
project. Essentially, what this means is that the IDF gains stake in the
project due to lending financial support to the project authority. This is
referred to as a compulsory buyout. Thus, this means that the IDF also takes up
the risk as well as the benefits associated with the project.


short, Infrastructure Debt Funds is a successful
vehicle for funding infrastructure projects in India. As per the RBI and
the union finance ministry, the main purposes of IDFs are to supplement lending
for infrastructure projects and act as a tool for the refinancing debts
incurred by the private player for the project which were previously funded by
commercial banks.