To enable the proposed state-owned development finance institution (DFI) to raise low-cost funds for long-term infrastructure financing, the government intends to top up its proposed grant of Rs 5,000 crore once it’s exhausted.
The corpus will be used to refund taxes to subscribers of bonds issued by the National Bank for Financing Infrastructure and Development (NaBFID)–as the DFI will be known–and to help it meet costs of hedging or commission if it raises funds from overseas, among others.
It is not a one-time grant, and the DFI will get additional support once the amount is used up, subject to a certain limit, official and industry sources told FE. The NaBFID Bill, which was cleared by the Cabinet on March 16, will be introduced in Parliament this week for passage.
Also, the Reserve Bank of India will take a call on allowing the DFI to issue bonds that would qualify for SLR (statutory liquidity ratio) investment by banks, said one of the sources. Any such move will make the DFI bonds very attractive, he added.
To ensure that the DFI has truly a professional board (with about a dozen members), the government will have only two nominees and at least half directors will be independent ones, said an official source. While the government won’t interfere in decision-making, there is no plan as of now to keep the DFI brass out of the ambit of the Prevention of Corruption Act, he added. Nevertheless, the top executives of the DFI will have the government’s backing for honest business mistakes.
The government expects the DFI to raise as much as Rs 3 lakh crore over the next five years, leveraging the proposed initial capital of Rs 20,000 crore. Initially, the government will fully own the DFI but, as more investors join in, it is willing to dilute its equity to 26%, finance minister Nirmala Sitharaman said last week after the Cabinet meeting.
The government has said it will grant the DFI tax benefits for ten years in a bid to woo patient capital from pension funds or sovereign wealth funds. The Indian Stamp Act will also be amended to extend incentives. On top of these, the DFI will likely have sovereign guarantee to garner resources (possibly from multilateral agencies).
Given that one DFI can’t satiate the voracious appetite of the infrastructure sector, the government will offer a five-year tax holiday for private-sector DFIs, the official said. The National Infrastructure Pipeline showcases over 7,000 projects with envisaged investments of Rs 111 lakh crore until 2025, reflecting the magnitude of potential financing requirement in infrastructure.
The move to enable the DFI to have access to low-cost funds comes amid realisation that since banks have access to CASA (current account savings accounts) deposits, their cost of funds is going to be cheaper than the DFI’s. So, the DFI has to be granted some flexibilities to stay competitive. Else, as witnessed in the past (DFIs like IDBI and ICICI were forced to morph into banks), it will struggle to stay afloat.
Govt plans to give DFI more funds upon exhaustion of initial Rs 5,000-cr grant
DFI to use it to refund taxes to bond subscribers, meet hedging costs, etc
RBI to take a final call on SLR status to DFI bonds
Private DFIs to be accorded tax holiday for five years
No plan yet to insulate DFI brass from Prevention of Corruption Act
Bill for DFI to be introduced in House this week