The government tabled a bill in parliament on Monday to create a Development Finance Institution (DFI) for long-term infrastructure projects after the Union cabinet approved it last week. The DFI was first announced by Finance Minister Nirmala Sitharaman in the Union budget on February 1st.
The National Bank’s Infrastructure and Development Financing Act of 2021 states that the FDI will initially be wholly owned by the government, but its stake will later be reduced to 26%. The Union budget has allocated ₹20,000 crore to capitalize the FDI, which is expected to have a loan portfolio of at least ₹5 trillion in about three years. It will be based in Mumbai, with regional offices in different cities.
Under the bill, the DFI will also help develop long-term non-recourse infrastructure finance in India, including the bond and derivatives markets necessary for such funding.
The creation of the new entity comes at a time when the Union government has decided to increase infrastructure investments to free the economy from the slowdown caused by Covid-19. The DFI finances projects in the National Infrastructure Pipeline (NIP).
The Union government is planning investments within the framework of the NIP ₹111 trillion in 7,671 infrastructure projects by 2024. The government also plans to give 10-year tax exemptions to long-term and stable investors such as pension funds that invest in them.
“The institution’s development goal is to coordinate with central and state governments, regulators, financial institutions, institutional investors and other relevant stakeholders in India or outside India to build and improve the relevant institutions to support the development of long-term non-recourse infrastructure finance in India, including the domestic bond and derivatives markets, “the bill reads.
Earlier this month, Sitharaman said the DFI will use its equity to raise as much as ₹3 trillion in the next few years. Tax incentives for the first 10 years and government support will help the institution limit fund costs, she said, adding the government expects it to raise money from pension funds and sovereign wealth funds.
The Union budget decided to increase spending on infrastructure projects in FY22. The capital spending of the central government is expected to touch ₹5.54 trillion euros next fiscal year, while it will likely close at ₹4.4 trillion in the current, according to the budget.
In order to aid speedy decision-making without fear of investigative authorities, the government has also stated that no lawsuit, prosecution or other legal process may be brought against the institution or its chairman or any other director, employee or officer for acts in good faith or under this Act or the Regulations or regulations issued under this Act, also with regard to the assets created or transferred to the institute.
According to Siddharth Srivastava, Partner, Khaitan and Co., the creation of the new entity will definitely close the existing gaps in long-term infrastructure financing, improve lending in the infrastructure sector and stimulate economic growth.
“Indian DFIs will also provide the infrastructure sector with much-needed acceleration with lower funding costs and loan arrangements with significantly longer maturities compared to commercial banks in general. However, to ensure the success of DFIs in India, transparent management and strict compliance with legal and political regulations are a must as it is public money, “added Srivastava.
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