The Deepak Parekh Committee on infrastructure financing has proposed a slew of measures aimed at stepping up insurance firms exposure to core sector projects. It said definition of infrastructure under various regulations, such as those relating to banks and insurance, and Acts (such as the Income-Tax Act) should be harmonised. RBIs broader definition, revised in October 2006, could be followed by IRDA as well as the tax authorities, it said. The harmonised definition should, however, explicitly include pipelines.

RBI definition of infrastructure covers roads, highways, port, airport, inland waterway/port, water supply and sanitation, telecom services, industrial park or SEZ, power generation, transmission and distribution. Besides, as per the central banks norm, public activities of similar nature, which the Central Board of Direct Taxes will notify in due course, would also be treated as infrastructure.

Considering that infrastructure companies do not enjoy high credit rating, at least, in the initial years, the committee proposed that the minimum rating requirement for bonds, hybrid instruments (such as convertible bonds) and securitised paper issued by infrastructure companies be lowered to BBB (investment grade) to qualify as approved investments. Currently, IRDA norms allow investment in assets/instruments under the approved category subject to a minimum credit rating of AA. To facilitate equity investment in infrastructure by insurance firms, investment in equity of listed infrastructure firms (including holding companies) and infrastructure schemes of equity MFs should qualify as approved investment, the panel said.

Highlighting the need to use long-term liabilities to finance long-term assets, the committee contended that insurance funds are more conducive for infrastructure funding, than bank funds. Private insurance companies in India, although small in size, are growing and could be important players in infrastructure financing, the committee noted. As fiscal correction gains momentum, a larger space could be created for insurance companies to invest in infrastructure.

Carrying forward the RH Patil Committees proposals to bolster the corporate debt market, the Parekh panel mooted removing restriction on the number of players in privately placed debt (the company law puts a restriction of less than 50 investors for an issue to qualify as private placement). It also stressed the need for an over-the-counter market for corporate bonds.

The committee noted the present regulatory bias for loans vis a vis bonds: Banks cannot invest in unrated debt instruments, nor can they invest in unlisted debt papers beyond 10% of their total SLR investments. The committee said banks investments in infrastructure bonds should be exempt from such curbs. Banks should be given an option to classify their bond holdings under either the trading category (with mark to market implication) or held-to-maturity category.

Long-term infrastructure bonds (over five years maturity) held by banks should be allowed to be classified under HTM category. The committee proposed separate regulatory treatment for infrastructure holding companies by according them a new titleInfrastructure NBFCs and allowing them to raise FDI through the automatic route.

The idea is to give them enhanced financial flexibility. Currently, these companies, classified as NBFCs, are subject to restrictions such as limits on bank borrowings, absence of automatic nod for ECBs, etc, besides the bar on FDI investment in them without RBI approval.

NBFCs exposure norms for infrastructure sector should be relaxed and brought in line with those for banks. Currently, the group borrower limit for NBFCs is 35% (only tier I capital) while that for banks is 50% (both tier I and II).

To reduce the cost of financing infrastructure projects, foreign borrowings raised by infrastructure companies, or project SPVs, could be exempted from withholding tax. Such exemption could also be given to FIIs and their sub-accounts investing in rupee denominated infrastructure debt instruments.

The panel also mooted rationalisation of the administration of dividend distribution tax (DDT) to avoid its cascading effect on the multi-tier corporate structure, which is common in infrastructure development business. Currently, core sector SPVs pay DDT on distribution of dividends to their holding company, which again is required to pay DDT while distributing dividends to its shareholders.

Another proposal is a tax rebate of 20% on retail equity investments in ultra mega power projects (UMPPs). This is in view of the fact that equity needs of UMPPs are huge, even as their long-gestation nature is a disincentive for retail investors.

Use of ECBs to refinance existing rupee loans should be allowed given the fact that foreign capital would normally be more forthcoming at later stages of the core sector projects when risks subside.

The committee also made a strong pitch for replacing the existing allocation process for FIIs, or their sub-accounts, to participate in debt schemes (which results in low absolute limits for each FII), with a first-come-first-serve rule. Lending to step-down project SPVs floated by infrastructure firms, without recourse to the parent, could be exempt from group exposure limit. It suggested a mechanism of credit conversion factor that will allow take-out financier to provide much less capital than now, until the takeout occurs. Take-out financing is designed to enable banks to avoid asset-liability maturity mismatches that may arise while extending tenor loans to infrastructure projects. Credit derivatives should be introduced and foreign investors should be allowed to trade in them.

It may be noted that the Budget more or less endorsed the route from RBI via IIFCL arms to the project developers to make use of a portion of forex reserves for infrastructure funding. The caveat is that these funds will be available only for capital expenditure outside Indiacapital goods imports and also building infrastructure such as pipelines abroad for domestic benefit. This is to avoid the risk of inflationary pressures which domestic prevalence of the released funds could cause, which RBI had earlier cautioned against.