Must-know: Infrastructure debt funds in India


Dec. 9 2014, Updated 4:00 p.m. ET

What are IDFs?

Infrastructure debt funds (or IDFs) are investment vehicles sponsored by commercial banks, non-banking financing companies (or NBFCs), and mutual funds in India in which both domestic and foreign institutional investors can invest.

IDFs are meant to refinance existing debt of infrastructure companies. Project loans that have been created via the public private partnership (or PPP) route and have successfully completed one year of commercial production will be taken over by these vehicles.

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IDFs were envisaged to take some pressure off commercial banks by providing long-term loans to infra projects. IDFs can be set up either as NBFCs or as mutual funds (or MFs). IDF-NBFCs can raise money via issue of either rupee or dollar-denominated bonds with a minimum 5-year maturity, while IDF-MFs can do so via issue of MF units.

Presently, there are two IDF-NBFCs and three IDF-MFs in India. The government has identified risk-averse off-shore institutional investors and sovereign wealth funds, among others as potential investors in IDFs.

How have they fared?

Even though it has been three years since IDF regulations came out, these instruments have been unable to achieve their objective due to rigid regulatory requirements and lack of suitable projects. They have invested around 15 billion rupees, or ~$250 million, whereas at the end of August, commercial banks’ exposure stood at 8.7 trillion rupees, or ~$145 billion.

For India-specific ETFs like the EGShares India Infrastructure ETF (INXX), the WisdomTree India Earnings Fund (EPI), and the PowerShares India Portfolio (PIN), it is crucial that infrastructure reforms happen quickly, as India’s economic growth is tied to it.

Also, for US companies present in India in real estate like CBRE Group (CBG) and the diversified Caterpillar Group (CAT), which operates under its CAT and Hindustan brands in India, a booming infrastructure sector would be profitable for business. Thus, this sector should be top priority for the government, and participants in the summit echoed the same sentiment.

In the next article, we’ll tell you the steps that India has taken to become more business friendly, keeping in mind its focus on manufacturing.


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