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Infrastrucuture Debt Funds (IDFs)

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The term Debt Fund is generally understood as an investment pool which invests in debt securities of companies. However,an Infrastructure Debt Fund(IDF) registered in India refers to a company or a Trust constituted for the purpose of investing in the debt securities of infrastructure companies or public private partnership projects.

Thus, in contrast to the general understanding of the term, IDF does not refer to a Scheme floated by a mutual fund or such other organizations but to the Company or Trust who is investing in debt securities. An IDF can float various Schemes for financing infrastructure projects.


IDF is a distinctive attempt to address the issue of sourcing long term debt for infrastructure projects in India. Union Finance Minister in his Budget speech for 2011-12 had announced setting up of IDFs to accelerate and enhance the flow of long term debt in infrastructure projects. IDFs are meant to

  1. supplement lending for infrastructure projects
  2. provide a vehicle for refinancing the existing debt of infrastructure projects presently funded mostly by commercial banks

Structure& Regulation

These Funds can be established by Banks, Financial Institutions and Non- banking Financial Companies (NBFCs).

IDFs can be set up either as a company or as a trust. A trust based IDF would normally be a Mutual Fund (MF) that would issue units while a company based IDF would normally be a form of NBFC that would issue bonds. Further, a trust based IDF (MF) would be regulated by SEBI; and an IDF set up as a company (NBFC) would be regulated by RBI.

The respective regulations were issued by RBI on 21 November 2011 and by SEBI on 30 August 2011 and 16 April 2013.

IDF –MF can be sponsored (sponsor is akin to a promoter) by any NBFC which includes an Infrastructure Finance Company(IFC) . However, IDF-NBFC can be sponsored only by an IFC.


The investors in IDFs would primarily be domestic and off-shore institutional investors, especially Insurance and Pension Funds who have long term resources. Banks and Financial Institutions would only be allowed to invest as sponsors / promoters of an IDF subject to certain conditions. The foreign investors eligible to invest in IDFs include FIIs/Sub-accounts, NRIs, HNIs, QFIs and long term foreign investors such as Sovereign Wealth Funds, Multilateral Agencies, Pension Funds, Insurance Funds and Endowment Funds. To attract funds, an exemption from income tax for IDF has been provided and also the withholding tax has been reduced to 5% from 20% on the interest payment on the borrowings of IDFs.


An IDF-MF would raise resources through issue of rupee denominated units of minimum 5 year maturity, which would be listed in a recognized stock exchange and tradable among investors. It would have to invest minimum 90% of its assets in the debt securities of infrastructure companies or SPVs across all infrastructure sectors, project stages and project types. The returns on assets of the IDF will pass through to the investors directly, less the management fee.The credit risks associated with the underlying projects will be borne by the investors and not by the IDF. This structure is focused on investors who can afford to take risk. An existing mutual fund can also launch an IDF Scheme.

An IDF-NBFC would raise resources through issue of either rupee or dollar denominated bonds of minimum 5 year maturity, which would be tradable among investors. It would invest in debt securities of only Public Private Partnership [Public_Private_Partnership_(PPP) (PPP) projects] which have a buyout guarantee (Buyout guarantee implies compulsory buyout by the Project Authority [which refers to the government agency who is awarding the contract or who is entering into a concession agreement with the private party] in the event of termination of Concession Agreement) and have completed at least one year of commercial operation. Refinance (essentially means replacing an older loan issued by a financial institution with a new loan offering better terms) by IDF would be upto 85% of the total debt covered by the concession agreement. Senior lenders would retain the remaining 15% for which they could charge a premium from the infrastructure company. Here, the credit risks associated with the underlying projects will be borne by the IDF. This structure is focused on investors who are risk-averse.

One major problem faced by banks while disbursing loans to infrastructure projects is the asset liability mismatch inherent with these projects. Therefore many such projects are denied financing by banks. In case of an IDF that issues bonds, credit enhancement inherent in Public Private Partnership (PPP) projects would be available.Such projects would involve a lower level of risk and consequently a higher credit rating.In case of IDFs that issue units, greater credit risk would be borne by the investors who will be free to seek correspondingly higher returns. MFs would be especially useful for non-PPP projects.By refinancing bank loans of existing projects the IDFs are expected to take over a fairly large volume of the existing bank debt that will release an equivalent volume for fresh lending to infrastructure projects. Thus, IDFs are expected to channelize the long-term low cost resources of Provident Fund/Insurance/Pension Funds for infrastructure financing. The IDFs will also help accelerate the evolution of a secondary market for bonds which is presently lacking in sufficient depth.

Regulations issued by RBI provide that a Tripartite Agreement, which shall be binding on all the parties thereto, will be entered into between the Concessionaire, the Project Authority and the IDF. Accordingly, a Model Tripartite Agreement has been approved to facilitate early operationalization of the Infrastructure Debt Funds.

The first IDF structured as a NBFC was launched on March 5, 2012, with ICICI Bank, Bank of Baroda (BoB), Citicorp Finance India Limited (Citi) and Life Insurance Corporation of India (LIC) entering into a Memorandum of Understanding (MoU).

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