The Income Tax Department recently announced an amendment regarding the eligibility for Income Tax exemption for Non-Banking Financial Company’s Infrastructure Debt Fund (IDF). This new notification allows IDF to issue three categories of instruments to raise money, opening up new possibilities for fundraising through External Commercial Borrowing (ECB).
Updated Rules for IDF Fundraising
According to the amendment, IDF can now issue rupee-denominated bonds or foreign currency bonds in compliance with the Reserve Bank of India (RBI) guidelines and relevant regulations under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. Additionally, zero coupon bonds and external commercial borrowings are also permitted under specific conditions set by the Foreign Exchange Department of the RBI.
One significant change is the minimum maturity period for bonds issued to non-resident investors, which has been set at 5 years. This condition now extends to ECB as well, ensuring consistency across fundraising avenues. Moreover, the amendment restricts borrowing from foreign branches of Indian banks, introducing a new layer of regulation to safeguard investment practices.
A crucial addition to the rules states that IDF cannot invest in projects where its specified shareholder, associated enterprise, or related group has a substantial interest. This measure aims to prevent conflicts of interest and maintain transparency in investment decisions, safeguarding the integrity of the fund’s operations.
Investment Guidelines and Strategic Shifts
The notification also outlines specific criteria for investments made by IDF, emphasizing the importance of post-commencement operation date infrastructure projects with a minimum of one year of satisfactory commercial operations. This strategic shift allows IDF to become a direct lender in toll-operate-transfer (TOT) projects, diversifying its investment portfolio and potentially increasing returns on infrastructure initiatives.
Furthermore, the notification defines a ‘specified shareholder’ as a non-banking financial company, a bank, or any other entity holding shares with at least thirty percent of the voting power in IDF. This definition clarifies the stakeholders involved in IDF operations, ensuring accountability and transparency in decision-making processes.
This regulatory update comes at a critical time when the Finance Ministry is encouraging banks and NBFCs to play a more active role in financing large-scale infrastructure projects. With India’s goal to achieve developed nation status by 2047, the need for collaborative efforts between financial institutions is paramount in supporting the country’s ambitious growth trajectory.
In a recent statement, Financial Services Secretary M Nagaraju highlighted the importance of pooling resources among NBFCs and banks to effectively finance infrastructure projects. This collaborative approach is essential for driving economic development and realizing India’s vision for a prosperous future.
The evolving landscape of IDF fundraising and investment practices underscores the dynamic nature of India’s financial sector. By aligning regulatory frameworks with the changing needs of the economy, the government aims to create a conducive environment for sustainable growth and development, paving the way for a promising future in infrastructure financing and investment.
