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Will This Turn the Infra Sector's Fortunes?
Fri, 5 Feb Pre-Open

To give a fillip to the creaky infrastructure in India, the government in its last budget had announced the creation of the National Investment and Infrastructure Fund (NIIF). This was proposed to be established as an alternative investment fund to provide long tenor capital for infrastructure projects. With the fund likely to be functional in the next financial year, let us take note of some of its major highlights and the benefits it would bring -

  • The initiative is in order to fast-track the mega projects under hold and to bolster the economic growth. It aims at infrastructure developments in viable projects, including stalled projects, mainly in the core infra sector.
  • The fund comes with a multiplier structure. It will be established as one or more Alternate Investment Funds (AIF) under SEBI. This means that the trust of the fund in turn will invest in other infrastructure finance companies which will enable them to lend more and leverage the inflow of funds.
  • To begin with, the NIIF will be a Rs 400 crore fund. Of this, up to 49% would be contributed from the government.
  • The fund will have a governing council that will guide the fund. The government will subsequently invite sovereign wealth funds and other investors to govern the council.

The benefits-

  • India's infrastructure spending stands at 6% of its gross domestic product (GDP). This is much lower than that of other emerging economies. For example, China spends 9% of its GDP on infrastructure. With NIIF coming in picture, there would be more funds available for infrastructure projects which in turn would set hopes for a turnaround in the sector.
  • NIIF will also bring some relief for public sector banks (PSUs). Traditionally, PSUs have been at the forefront of providing long term finance to infrastructure sector. This has put a strain on their balance sheets given the long gestation period of infrastructure projects. However, with infrastructure projects getting cash from NIIF there would be less debt on the banks books.
  • On the equity side, the fund is said to seek equity participation from overseas investors. So far, number of sovereign and pension funds, including from Singapore, the UAE and Russia, have evinced interest in the NIIF. Hence, more foreign funds will be seen entering in India's infrastructure sector.
  • NIIF will leverage its funds to provide a multiplier effect. Instead of investing directly in infrastructure, NIIF will run a series of funds by providing them equity. This will multiply the initial government contribution manifold. Also, it would translate government providing less funds out of its budgetary resources each year for the infrastructure sector.

NIIF is a step in the right direction. While the plan may have been laid in a proper manner, it is its execution that will be the key to its success.

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1 Responses to "Will This Turn the Infra Sector's Fortunes?"

N Gopalan

Feb 5, 2016

Dear Sir,
If sovereign funds would be investing in this Fund what kind of returns would they expect? And whether the returns - normally sedate - from long gestation projects would satiate their expectations? Not to play devil's advocate but just to ascertain whether such schemes have worked earlier. Would be grateful for a reply.

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