The Ministry of Finance has issued a press release that paves the way for setting up “Infrastructure Debt Funds (IDFs) in order to accelerate and enhance the flow of long term debt in infrastructure projects for funding the government’s ambitious programme of infrastructure development.” IDFs are envisaged to be suitable vehicles that enable raising debt to finance infrastructure projects.
The Ministry’s proposal contemplates two organizational structures for IDFs. The first is a vehicle in the form of a mutual fund using the traditional trust structure. The second is a company structure that is established in the form of a non-banking finance company (NBFC). Due to the nature of regulation governing the two types of entities, an IDF set up as a mutual fund (trust) will be regulated by Securities and Exchange Board of India (SEBI), while an IDF set up as an NBFC will be regulated by the Reserve Bank of India (RBI).Although the proposal to set up IDFs is laudable and could result in obtaining the require finance to develop infrastructure, the nature of dual regulation could result in problems in implementation and also regulatory arbitrage. Past track record also indicates that overlapping jurisdiction of multiple regulators could cause confusion, as we have witnessed last year in the ULIP saga. Unless any other alternative is pursued, the Financial Stability and Development Council (FSDC) established a few months ago would have to bear the burden of coordinating policy-making among the different financial sectors regulators.