Recent efforts at reviving infrastructure financing: A day too late, a rupee too less

It has been more than two-and-half years when the budget made a noise about infrastructure debt funds (IDFs). The Cabinet on 4th October finalised the tripartite agreement that will possibly pave the way for infrastructure debt funds (IDFs), but their acceptability by the capital market will only need to be seen


In the spate of so-called steps to restart the jammed tempo of Indian economy, infrastructure obviously must have taken the key place. And as for reviving infrastructure, infrastructure financing, the government has taken a few initiatives, but all this is still too little for reviving the sector which, going by the mood that we saw at our recent Infrastructure Finance Summit, is almost in tears. But for brave faces seemingly saying—we can cope up with this also—the participants at the Infrastructure Finance event were melancholy.

One of the things the Cabinet recently cleared is the tripartite agreement that will possibly pave the way for infrastructure debt funds (IDFs). Several proposals for IDFs, mostly in the mutual fund route and some in the NBFC mode, are currently lying before the Securities and Exchange Board of India (SEBI) or Reserve Bank of India (RBI). The IDF guidelines of the RBI came in September 2011, following an announcement in Budget 20101. The guidelines require that the IDFs sign a tripartite agreement between the lender, the concessionaire and the IDF. The format of the tripartite agreement was not firmed up for all these months. It was only on 4 October 2012 that the tripartite agreement was finalised. With this, possibly, SEBI and RBI will give go-aheads for the IDFs, for which several applications are currently pending.

Read here about infrastructure bonds being eligible for investment by charitable/religious trusts.

It is not that tonnes of money are waiting for the launch of IDFs. As regards international investors, practitioners confirm that currently there is no interest in the India story, and more so for the infrastructure sector, which has recently seen such episodes as cancellation of telecom licenses, revocation of coal block allotments, and so on. The overall image of India was already tarnished with the infamous proposals of the then finance minister on retrospective taxation; with that, the blows that the courts gave in response to corruption scandals were just too much to bear.

In addition, the schemes of IDFs suffer from several fundamental flaws. The two options—mutual funds and NBFCs—have so much of disparity that they seem to be two uncomparable instruments. An IDF-NBFC, as the RBI calls it, has capital as its essential corpus and raises funding by issuing bonds. The capital of the IDF-NBFC acts as a first-loss credit enhancement. Given the capital requirement of 15%, and risk weight of 50% for the infrastructure loans that an IDF-NBFC will acquire, this would mean a minimum 7.5% credit enhancement for the bondholders. Every IDF-NBFC may be visualised as a sort of pool of infrastructure loans. Hence, the bonds issued by an IDF-NBFC essentially represent securitisation of the pool of loans that that the IDF-NBFC holds. In case of a proper securitisation of infrastructure loan pools, the sizing of the enhancement will be derived looking at several factors such as the default rate, level of diversification, granularity of the pool, and so on. The regulatory minimum credit enhancement of 7.5% for a dynamic pool with no safeguards as to diversification is unlikely to be as appealing to investors as a securitised instrument would have been.

On the other extreme, the mutual fund option, or the tag of “mutual fund” for any collective investment scheme that invests in infrastructure loans, is wholly misconceived. It is notable that in the Alternative Investment Fund (AIF) regulations, there is an option to have an AIF for infrastructure funding. However, mutual funds are seen as instruments that invest in capital markets. There is no question of credit enhancement in case of the mutual fund option—hence, any one loan out of the pool of infrastructure loan going bad will expose the investors to NAV losses. Unlike a mutual fund that invests in capital market instruments, the one investing in infrastructure loans is unlikely to have either the granularity that a mutual fund needs, or the transparency in the fair valuation of its own assets—leaving investors to a substantial disadvantage. The investments that such a “mutual fund” will make will be infrastructure loans, which are big ticket, illiquid and long maturity assets. There is no transparency in pricing of such assets, and it would always be hard and subjective to declare the NAV of such a mutual fund. If such a mutual fund is an open-ended fund, the fund manager may find it hard to liquidate the units. If the fund is a closed-end fund, the fund goes through the entire rigmarole of listing. In any event, the mutual fund route is understood, world over, as the device to make capital market investments, and it would not be surprising if a mutual fund agent markets an infrastructure mutual fund to unsophisticated investors claiming it to be something like a mainstream mutual fund.

In essence, with the AIF route being available, the mutual fund option should not have been envisaged for infrastructure loans.

Despite this, the reason why most players have opted to go for the mutual fund route to IDFs is clearly because of the convenience and scope for wide discretion in case of the mutual fund option as compared to the NBFC route.

It has been more than two-and-half years when the budget made a noise about IDFs. The regulators have taken their own good time to clear the all-needed documentation. So, hopefully the finalisation of the tripartite agreement is the last of the regulatory steps, and now, IDFs are at least regulatorily ready to take off. Their acceptability by the capital market, of course, will only need to be seen.

In the meantime, the interim report of the High Level Committee on Financing of Infrastructure came out in August 20122. Note that the Committee was constituted almost two years ago—in November 2010—so, it is not sure whether it is the complexity and enormity of the problem, or the changes in the constitution of the Committee, that even an interim report has taken this long time. The interim report has made several sector-specific recommendations, besides making pointed recommendations regarding IIFCL. The recommendations for IIFCL relate to redirecting of its operations, so that the overlaps between IIFCL and banks/IFCs could be avoided.

The essence of the Committee making its interim report lay in the fact that there were measures which required immediate attention, and it is not safe to wait for the submission of the final report, which may come around March 2013. However, it does not seem whether the government has taken any action on any of the sector-specific recommendations of the Committee, most of which may be politically sensitive.

In short, India still seems to be going slow, and not steady, on the highway of infrastructure.

To read more articles by the same writer, click here.

(Vinod Kothari is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance. He can be contacted at [email protected]. Visit his financial services website at

1See our article commenting upon the IDF guidelines, at Among other things, the article provides an overview of different forms of special purpose entities for financing or refinancing of infrastructure.




HDFC Bank Q2 net profit jumps 30% to Rs1,560 crore

HDFC Bank's second quarter profit increased 30% due to robust net interest income which helped it to earn quarterly revenues of Rs9,869.8 crore

Mumbai: Private sector lender HDFC Bank on Friday posted 30.1% jump in its second quarter net profit to Rs1,559.98 crore, reports PTI.
HDFC Bank had posted net profit of Rs1,199.35 crore in the corresponding period last year.
During the quarter to end-September, the Bank's net interest income rose 26.7% to Rs3,731.7 crore while non-interest income increased marginally to Rs1,345.1 crore from Rs1,211.7 crore during the second quarter this fiscal, it said in a filing to the BSE.
Its core net interest margin stood at 4.2%. The bank's total revenues also jumped to Rs9,869.8 crore, from Rs7,929.4 crore, it said.
The second largest private sector lender saw its balance sheet size increase 19.5% to Rs3.8 lakh crore at the end of the reporting quarter.
Its net advances were up 22.9% at Rs2.31 lakh crore, compared to the September 2011 figure while deposits were up 18.8% at Rs2.7 lakh crore.
The share of the low-cost current and savings account deposits stood at 45.9%.
The bank scrip was trading at Rs630.25, up 0.91% on the BSE, whose 30-share benchmark Sensex was down 0.54% at 1400 hours.



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5 years ago

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Non-bailable warrant against Mallya, Kingfisher on complaint by GMR

Many airports have filed cases against Kingfisher for dishonouring cheques. However, this time GMR made sure that the Court in Hyderabad issues non-bailable warrant against Vijay Mallya as well

Vijay Mallya-owned Kingfisher Airlines continues to be drawn in to more troubles for itself and its owner as well. On Friday, a local Court from Hyderabad has issued non-bailable warrant against the carrier and its chairman in a cheque bouncing case filed by GMR Hyderabad International Airport Ltd.
GMR, which manages Rajiv Gandhi International Airport in Hyderabad, had filed a case against Kingfisher in the Special Magistrate's Court for dishonouring cheques worth over Rs10 crore by the Vijay Mallya-owned Airlines.
The 13th Special Magistrate Court at Erramanzil issued the warrant against Kingfisher Airlines, Vijay Mallya, CEO Sanjay Agarwal and three other directors of the company and posted the case to 5th November.

The court had earlier taken cognisance of the matter and issued summons against the company and the five directors (including Mallya and Agarwal) asking them to appear before it by Friday.

The counsel of Kingfisher, who had appeared on their behalf, filed an application before the court over non-appearance of their clients and requested the court not to issue the NBW.

However, Judge Kedara Chary dismissed the same and issued the NBW against them, one of the counsels of GMR JB Chenna Keshava Rao said.

There was an agreement between Kingfisher and GMR under which Kingfisher was collecting user development charges/fee from passengers with regard to Hyderabad airport charges and the Mallya-owned carrier was supposed to remit GMR the money amounting to around Rs 10.5 crore, which it did not pay.

"They (Kingfisher and Mallya) became due and were liable to pay the amount over Rs 10 crore. When we demanded the amount, they issued cheques over a period of time since January this year which were dishonoured when presented for clearance. After this, legal notices were also served but they did not make the payments," Rao said.
Last month, GMR-operated Delhi International Airport Pvt Ltd (DIAL) dragged Kingfisher to court after cheques of about Rs3 crore issued by the carrier, bounced. 
Earlier in July, GVK-run Mumbai International Airport also filed a case against Kingfisher Airlines in cheque bounce issue. The court at that time, issued summons against top management of Kingfisher for dishonouring cheques worth about Rs15 crore.  
According to media reports, Kingfisher owes over Rs40 crore, including airport user fee, to DIAL.
Kingfisher also owes Airports Authority of India (AAI) the maximum amount of over Rs250 crore towards charges relating to landing and parking, route navigation facility charges and licence fee.
Meanwhile, according to a PTI report, the ailing Airlines has extended its lockout till the next weekend, apparently after failing to convince its striking staffers, protesting delay in salaries, to return to work.

Airline sources said the airline management, in an internal mail, has said that due to operational reasons, all flights across its network would be cancelled till 20th October.

The mail came a day after Kingfisher CEO Sanjay Aggarwal appealed to all employees, striking over non-payment of salaries for seven months, to return to work to resume flight operations soon. The employees are insisting that the salaries be paid first before they resume duty.

With all its flights cancelled since the lockout declared on 4th October, aviation regulator DGCA earlier asked liquor baron Vijay Mallya-owned carrier to stop selling tickets following reports that it had started accepting bookings last week before ending its lockout.

Kingfisher had declared a lockout on 28th September till October four following the strike, cancelling its entire flight schedule, and extended it till 12th October later. This has now been extended till 20th October.

On 5th October, DGCA issued a show-cause notice to Kingfisher asking why its flying license should not be suspended or cancelled as it had grounded its entire fleet and failed to offer safe, efficient and reliable service. It has given the airline 15 days to reply.

Civil Aviation Minister Ajit Singh has also said the airline would have to submit a concrete plan to DGCA on safety and salary payments, before it is allowed to resume flights.

Kingfisher has been saddled with a loss of Rs8,000 crore and a debt burden of another over Rs7,000 crore, a large part of which it has not serviced since January.


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