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Norms Soon on Fund to Back Infra Bonds

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The government is holding consultations with the Reserve Bank of India to prepare guidelines for the proposed fund being set up to provide guarantee to lower-rated bonds issued by infrastructure companies and bolster their ratings.
“We expect that the guidelines will be finalised shortly and the proposed special purpose vehicle (SPV) will soon commence operations. Already, in-principal approvals have come from all participants,“ said a finance ministry official. The proposed firm may be called National Infrastructure Credit Enhancement. The SPV will be set up by the state-run India Infrastructure Finance Company Ltd. (IIFCL), and the other contributors are Life Insurance Corp, General Insurance Corp, and State Bank of India, the country's largest bank.
Power Finance Corp and Punjab National Bank will also participate in the structure, which will provide credit enhancement to infrastructure projects.
According to RBI data, more than 85% of corporate bond issuance in India is by borrowers with ratings of `A' and above. Credit enhancement helps issuing companies im prove their bond ratings, as the bond payment is guaranteed to a certain limit. The issuer also gets access to markets at cheaper rates than borrowing from banks.
In his budget speech for 2015-16, finance minister Arun Jaitley had proposed setting up of a credit enhancement fund to help raise the ratings of bonds floated by infrastructure companies and attract long-term investors.
The SPV , which may start with an initial capital of Rs 1,000 crore, will initially provide support to bonds of only those projects which have commenced operations.
“We expect to extend this rating boost to greenfield projects after at least two years of operations,“ said PR Jaishankar, chief general manager, IIFCL.
“Our projections are that in the next decade, this firm should be providing guarantee cover of about `50,000 crore to bonds issuances of around Rs 2 lakh crore,“ he said.
But another official, who is aware of the developments, said that the RBI's reluctance to relax the 30-day rule may act as a roadblock for this fund to achieve its full efficiency and that most rating agencies are also reluctant to upgrade the ratings because of this clause.
As per RBI guidelines, if the bond issuer uses the credit enhancement facility, it has to repay that amount taken within 30 days.
“So, this instead of a long-term guarantee becomes more like a bank guarantee which defeats the whole purpose of credit enhancement, which is a long-term financing instrument,“ said the official quoted above.
The Economic times New Delhi, 25th April 2017

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