With an eye on increasing foreign investments in the infrastructure sector, the Deepak Parekh committee on infrastructure financing has recommended withholding tax exemption for FIIs investing in existing debt schemes, allowing infrastructure holding companies to raise FDI under the automatic route and permitting refinancing of rupee loans through the external commercial borrowings (ECB) route.

In its interim report submitted to the finance ministry, the committee has noted that existing limits for FIIs under the 100% debt scheme ($3 billion) and the 70:30 scheme (70% debt and 30% equity with a ceiling of $1.1 billion) remain unutilised due to the allocation process being followed. Under both the schemes, the limit for investments in government securities and treasury bills is higher than the limits for corporate debt.

At present, these limits are allocated to FIIs by a bidding process, which results in low absolute limits for each FII, weakening their incentive to actively utilise their allocated limits. Hence, the committee has suggested replacing the existing allocation process with a first-come, first-serve basis for both the schemes. Further, it has recommended that an additional limit for investment in long-term debt instruments issued by infrastructure companies should also be considered.

For infrastructure holding companies, such as L&T Infrastructure Development Project, it has been recommended that they be treated as a separate class of non-banking finance companies (NBFCs) to exempt them from current restrictions applicable to NBFCs. As of now, most developers, such as L&T, Gammon and GMR Infrastructure, house all their infrastructure investments in a holding company as a separate business from that of the parent company.

This recommendation has been made in light of the fact that these holding companies get classified as NBFCs under RBI guidelines. This puts restrictions on these entities, such as compliance with stringent regulatory guidelines, limits on bank borrowings, bar on ECBs via automatic route and mandatory RBI approval for investments.

Further, present guidelines do not permit raising ECBs for refinancing existing rupee loans. Keeping in mind the fact that foreign financiers may not be keen to participate in projects at the early and risky stage but may be willing to do so after a certain period when the risks subside, the committee has recommended that refinancing should be allowed.

This way, the Indian lenders will be able to exit the project by raising ECBs for refinancing the loans while foreign financiers will have the option of entering a project at a less risky stage.