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Aug 15, 2012, 12.12 PM IST
Fund houses in India have started offering infrastructure debt funds (IDFs) to investors as it proves to be an integral part of raising money for key infrastructure projects, reckons Nirmal Bang
Although the product has not seen much demand from the public, it can still be considered as a good start for a product, which can address the issue of sourcing long-term debt for infrastructure projects in India. Recently, Reliance Mutual Fund filed an offer document with the Securities and Exchange Board of India (SEBI) to launch infrastructure debt funds, a close-ended debt fund that requires a minimum application size of Rs1 crore.
Apart from Reliance Mutual Fund, SBI Mutual Fund along with IDBI Mutual Fund, Axis Mutual Fund and L&T Mutual Fund too have filed an offer document with the similar theme. Up till now only IDFC has obtained SEBI's approval to start its infrastructure debt fund. The framework for the establishment of infrastructure debt funds was announced by the then Finance Minister Pranab Mukherjee in the Union Budget 2011-12, wherein IDFs were allowed to be set up either structured as an Non Banking Financial Companies (NBFCs) or as a mutual fund.
IDFs can be an integral part of raising money for key infrastructure projects as currently banks are the main source of funding for such products. Market players highlight that in the past few years infrastructure companies have been facing difficulties in raising money following asset-liability mismatches and loan exposure limits set by the Reserve Bank of India (RBI). It is also important as in the current 12th Five Year Plan (2012-17), India's Planning Commission has projected an investment of $1 trillion for infrastructure development.
An IDF can be set up either as a trust regulated by the SEBI or as a company regulated by the RBI. However, this article will dwell on the fund houses that have either come out with IDFs or are in the process of launching the product. However, there are few concerns over the infrastructure sector in India, which has resulted in a slow pick-up in DFs by fund houses. Hardly 5-6 players are coming out with IDFs, despite India boasting of over 40 asset management companies in India. Take for example the Reliance Infrastructure Debt Fund. The investment objective of the scheme is to generate regular income and capital appreciation by investing in investment themes within the infrastructure sector such as transport, energy, communication, social and commercial infrastructure that fall under its purview. The Reliance Infrastructure Debt Fund in its offer document with SEBI stated, "Being a close-ended scheme, the units can be purchased only during the New Fund Offer (NFO) period of the scheme. No redemption or repurchase of units shall be allowed prior to the maturity date of the scheme." It further said that units held in dematerialized form can be traded on the stock exchange, where the units are listed. The units of the scheme shall be listed either on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) depending upon the fund houses. Each series of the scheme shall have a firm commitment from strategic investors for contribution of an amount of at least Rs 25 crore before the allotment of units of the scheme is marketed to other potential investors. Each series of the scheme shall have a minimum of five investors and no single investor shall hold more than 50% of net assets of each series. Each series under the scheme will come to an end on the maturity date. On maturity of the series, as a default mechanism, the outstanding units shall be redeemed and proceeds will be paid to the unit holders. There are, however, concerns among various investors regarding the difference between infrastructure schemes and IDFs. There are several infrastructure schemes in the country right now, which invest in equities of infrastructure companies. IDFs aim to invest in debt papers of these companies. Sometimes even debt papers can yield better returns then shares of infrastructure companies and also they cannot be volatile as shares listed on the stock exchanges. Mukherjee had also asked NBFCs to start IDFs. But fund houses will have an advantage in terms of cost, as fund houses can launch schemes within their existing set up, while NBFCs will have to float a new company to launch IDFs, which could have some impact on overall returns
Where Will The Scheme Invest And Investment Strategies
As said earlier, IDF is a type of scheme, which can be in great demand for high net worth individuals (HNIs) and mature investors. Since IDF schemes will be close-ended, the corpus will be invested in a mix of securities such as securitized debt instruments of infrastructure companies and infrastructure capital companies.
Apart from this, it can also be invested in short-term papers such as certificates of deposits or even fixed deposits or commercial papers to meet sudden liquidity requirements.
On the equity side, the fund will invest in equity shares of companies engaged in infrastructure as well as infrastructure development projects that are listed on a recognized stock exchange in the country. However, the usage of credit default swaps, interest rates futures and interest rate swaps will be limited for the purpose of hedging and portfolio rebalancing. The fund shall be managed according to the investment objective, which is to generate regular income and capital appreciation by investing in investment themes within the infrastructure sector.
The investment strategy would be to identify a diversified universe of infrastructure investment options with due consideration given to sectors, nature of project and the capital structure. Within this universe, the fund manager will identify and invest in securities with acceptable credit quality and those options that generate an optimal risk reward ratio on a relative basis.
In current times when incomes of people are going up, they need to consider alternative investment avenues apart from equities and debt. In this scenario, infrastructure debt funds can play an important role and become an integral part of any individual's portfolio.
Given the sky-rocketing prices of real estate in most parts of urban India, many investors want to invest in real estate but are unable to do so with a sum of Rs 20 lakh to Rs 30 lakh. Such investors can definitely look at infrastructure debt funds. In fact, it has already generated a lot of interest among various investor classes. Apart from this, if we look at some of the real estate stocks as well as infrastructure stocks, we find that they have been beaten down badly by the markets in the past few years. Moreover, the prices of such stocks haven't moved to great heights and have remained volatile since the global meltdown. Many infra and real estate companies are cash-strapped and will therefore be raising debt, which can be available at a higher rate. And if infrastructure debt funds invest in that paper, then they might fetch god returns for investors. However as per SEBI's rule, mutual fund houses cannot indicate returns. But this scheme is for informed investors and not for the masses.
On the flip side, investors will not be able to get the returns they will earn if they want to invest in such schemes. Hence, they will have to stay fully invested for the whole tenure to earn decent returns.
Source: Nirmal Bang's Beyond Market
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