One of the biggest hurdle for India’s infrastructure expansion plans is lack of funds. The country need around $1000 bn in five years to finance the infrastructure programmes extending from roads to communication. To overcome the financing hurdle, the government made several steps including the formation of infrastructure financing companies like the IIFCL (Indian Infrastructure Finance Company Limited). But still, the quantum of money flow has not occurred and the PPP model has failed to contribute much. It is in this context that the government has come out with a fresh idea of floating a fund mobilizing entity called National Investment and Infrastructure Fund (NIIF).
The NIIF is a trust that mobilizes funds so that it can give finance to the major infrastructure financing companies in the country. In this sense, the NIIF will act something like a bankers’ bank in infrastructure financing.
The NIIF registered as a Category II AIF with SEBI
As per the initial plan about the structure of the NIIF, the circular from the government says that it will be established as one or more Alternative Investment Funds under the SEBI regulations. In December 2015, the NIIF was registered as a Category II AIF (Alternative Investment Fund) with SEBI. Initial authorized capital of the Fund is set at Rs 20000 crore, which will be revised from time to time in accordance with the Ministry of Finance’s decision. An initial allocation of Rs 4000 crore was made under the budget 2016-17.
Alternate investment funds (AIFs) are regulated by the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, and classified under three categories – Categories I, II and III, from the angle of tax treatment under provisions of Income Tax Act. Since it was set up as Category II AIFs, the NIIF is eligible for a pass through status under the Income Tax Act. A ‘pass-through’ status means that the income generated by the fund would be taxed in the hands of the ultimate investor, and the fund will be exempted.
Both greenfield and brown field projects can be financed out of NIIF.
Nature of Government ownership
The structure and ownership of the NIIF is that government’s ownership in each entity set up under it will be 49%. It will not be either increased or decreased and is contributed directly by the Government.
The Ministry of Finance Press Release says that the contribution of government in NIIF will enable it to be seen ‘virtually as a sovereign fund’. Purpose of such a structuring and ownership involvement in NIIF by the government is to acquire the trust of big and creditworthy foreign investors like sovereign/quasi sovereign/multilateral/bilateral investors to co-invest in it. The NIIF will seek the participation of strategic anchor partners. Already many foreign biggies like Abu Dhabi Investment Authority have shown their willingness to participate in the NIIF.
The 49% government holding will make it like a sovereign fund with guarantee of the government and will attract foreign investors besides generating trust among the foreign investors because of sizable government ownership and management.
A typical sovereign wealth fund (SWF) will be a state-owned investment company like the China Investment Corporation or the GIC of Singapore which are owned by governments and invests their own money (foreign exchange reserves) in foreign countries. These funds are known as SWFs and invests in assets such as stocks, bonds, real estate, commodities etc. The NIIF is not such an entity and hence can’t be called as an SWF in the pure sense.
First governing council meeting of the NIIF was held in December 2015 and Sujoy Bose was appointed as the first CEO. India Infrastructure Finance Company Ltd (IIFCL) was appointed as Investment Advisor to NIIF Ltd and IDBI Capital Market Services Ltd as Advisor to NIIF Trustee Ltd.
Functions of NIIF are as follows:
1. Fund raising through suitable instruments including off-shore instruments and attracting anchor investors to participate as partners in NIIF;
2. Servicing of the investors of NIIF.
3. Considering and approving candidate companies/institutions/ projects for investments and periodic monitoring of investments.
4. Investing in the corpus created by Asset Management Companies (AMCs).
5. Preparing a shelf of infrastructure projects and providing advisory services.