NOC to Sponsor Infrastructure Debt Fund by NBFC

Narendra Kumar

08 Dec, 2020

NBFCs Physical and Social infrastructure growth plays a vital role in the growth of the Indian Economy. In recent years, investment in the infrastructure sector has augmented. Where Bank lending to the infrastructure sector or Infrastructure Debt fund has been slowing down, the private sector has entered to provide additional funding for infrastructure projects.

What does the term Infrastructure Debt Fund mean?

• Infrastructure Debt Funds (IDF) are investment vehicles for channelizing investment into the infrastructure sector.
• In India, they are normally funded by commercial banks and NBFC Registration in which domestic/offshore institutional investors, especially insurance and pension funds can invest through units and bonds issued by the IDF’s.
• Infrastructure Debt Funds (IDF) can be set up in two way either as a Trust or as a Company.
• Trust-based IDF will be formed as a Mutual Fund, which is regulated by SEBI.
• Company based IDF will be formed as NBFC, which is regulated by RBI.
• IDF-MF can be sponsored by banks and NBFCs.
• IDF-NBFC can be sponsored by banks and Infrastructure Finance companies NBFC.
• ‘Sponsorship’ means equity participation by the NBFC between 30 to 49% of the IDF.

What is Infrastructure Debt Funds: Non-Banking Financial Companies (IFDs-NBFC)?

• IDF-NBFC is an NBFC who provides the flow of long-term debt into infrastructure projects.
• IDF-NBFC raise resources through issue of Rupee or Dollar-denominated bonds of minimum 5-year maturity.
• IDF-NBFC is a company and comes under the regulation of RBI.
• IDF-NBFCs shall take over loans protracted to infrastructure projects. The project shall be created through the Public-Private Partnership (PPP) route. And the project shall have successfully completed one year of commercial production.

Infrastructure Debt Funds set up through NBFC route – In India:

In India, there are four NBFC-IDFs are registered with the RBI, India Infradebt, L&T Infra Debt Fund, IDFC Infra Debt Fund, Kotak Infrastructure Debt Fund, which have grown their asset from ₹600 crores around two years ago to over ₹9,000 crores in the current fiscal.

These funds are still minute in the larger context of banks’ lending exposure to the infrastructure sector. But the RBI expanding the scope of projects that can be financed under the IDF-NBFC route.

What are the Eligibility criteria for NBC to be as Sponsor of IDF-MF?

NBFCs sponsoring IDF-MFs are required to comply with the following requirements:

• Minimum Net Owned Funds (NOF) of Rs. 300 crore.
• Capital to Risk-Weighted Assets (CRAR) of 15%.
• NPAs should be less than 3% of net advances.
• it should have been in existence for at least 5 years before application;
• It should have been profitable in the last three years;
• Post investment in the IDF, the sponsor must maintain minimum CRAR and NOF prescribed;
• There should be no supervisory concerns with respect to the NBFC.

What are the Eligibility criteria for Infra Finance Company NBFCs (NBFC-IFC) to sponsor IDFs-NBFC?

• The Infrastructure Finance Company NBFCs (NBFC-IFC) can sponsor IDFs. They have to meet the conditions for sponsoring an IDF-NBFC.
• Minimum Net Owned Funds (NOF) of Rs. 300 crore.
• Capital to Risk-Weighted Assets (CRAR) of 15%
• Net NPAs less than 3% of net advances
• It should have been in existence for at least 5 years before the application
• It should have been profitable in the last three years;
• IFCs Sponsor would be permissible to contribute a maximum of 49 percent to the equity of the IDF-NBFCs with a minimum equity holding of 30 percent of the equity of IDF-NBFCs.
• The prior RBI approval is required to sponsor in IDF-NBFCs
• Post investment in the IDF, the sponsor must maintain minimum CRAR and NOF prescribed for IFCs.
• Credit rating ‘A’ or equal of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other accredited rating agencies shall be allocated to IDFs.

What is the Procedure for registration as NBFC-MFI?

The Company shall make an application to RBI^[1] to grant registration certificate as NBFC along with the required documents for such registration.

In addition to required documents for registration as NBFC, following additional documents shall be submitted while applying for NBFC-MFI:

• Board Resolution containing below:
• The company shall be Member of all the Credit Information Companies and shall at least member of one Self-Regulatory Organisation.
• The company shall adhere to the RBI Guidelines.
• The company has fixed internal exposure limits to avoid any undesirable concentration in specific geographical locations.
• The company should not be licensed under Section 25 of the Companies Act, 1956 or Section 8 of the Companies Act, 2013.

What is the Procedure for registration as NBFC-IDF?

The Company shall make an application to RBI to grant registration certificate as NBFC along with the required documents for such registration.

Following documents are needed for NBFC Registration and further required to applying for NBFC-IDF :

• No objection Certificate from RBI issued to NBFC-IFC for sponsoring the NBFC-IDF.
• Copy of Tripartite Agreement between the concessionaire, the Project Authority, and NBFC-IDF
• Details of change in the management of the sponsor company during the last financial year to date.
• Source of start-up capital of the company with documentary evidence. NBFC-IDF would raise resources through issue of either Rupee or Dollar denominated Bonds of minimum 5-year maturity.

Other process remains similar to the registration of NBFC.

No Objection Certificate of RBI:

Infrastructure Debt Fund can be sponsored by the Banks or NBFCs in India. Infrastructure Debt Funds (IDF) can be set up either as an IDF-MFI or IDF-NBFC, which is sponsored by the Bank or NBFC or Infrastructure Finance companies NBFC. An NBFC or NBFC-IFC shall take No objection Certificate from Resave Bank of India to be the sponsor of IDFs.

Conclusion:

The Infrastructure Debt Fund has facilitated infrastructure project to raise long-term funds at a cheaper rate.  This fund offers long-term fixed-rate debt. This lowers the interest rate risk for the project and typically rating agencies give a higher rating for such projects. In India, NBFC-IDFs have attained good growth considering it as preferred route because an investor can invest only those infrastructure projects that have successfully completed one year of commercial production. Hence they do not carry construction risk. Also, the good credit rating shall require raising fund through NBFC-IDF which appeals long-term investors to invest.