Cabinet clears Bill on setting up DFI with capital infusion of Rs 20,000 cr

The Cabinet has cleared a Bill to set up a government-owned development financial institution (DFI) with an initial paid up capital of Rs 20,000 crore so that it can leverage around Rs three trillion from markets in a few years to fill the space of providing long term funds to infrastructure projects as well as for development needs of the country. To put it in perspective, Rs three trillion constitutes a bit less than three per cent of Rs 111 trillion, which is the cost of over 7,000 projects in the National Infrastructure Pipeline for 2019-20 to 2024-25.

Besides, the government will give Rs 5,000 crore as grants to the institution, finance minister Nirmala Sitharaman told media after the Cabinet meeting. The DFI will be fully government-owned initally and the promoter's stake will be brought down to 26 per cent in the next few years, she said.

"We have acknowledged that both development and financial objectives will matter for setting up a DFI. We have mentioned it in the Budget and even as the Budget session is on, the Cabinet has already cleared setting up of DFI. With this, we will have an institution and institutional arrangement which will help in raising long term funds," she said.

On speculations that infrastructure finance body IIFCL would be merged with the proposed DFI, financial services secretary Debasish Panda said the new institution will start on a "clean slate". Once the institution is set up, its board will decide about acquistion or merger of other companies, he said.

The government will provide ten-year tax exemptions to funds invested in DFI to attract long term players such as insurance and pension funds. Besides, concessions from stamp duty would be given for which Indian Stamp Act will be amended.

"Through all this, we expect big pension funds, sovereign wealth funds, would all come. Just as we are able to attract them in the national infrastructure investment fund, we will be able to do this towards DFI too," Sitharaman said.

Dibyanshu, partner at Khaitan & Co., said the tax benefits and stamp duty concessions for ten years should solicit interest from pension funds and sovereign wealth funds which are key players in the space.

The government is also planning to give DFI certain securities because of which costs of funds will come down. There will also be a positive impact on the bond market because of this, she said.

Panda said insurance funds invest in infrastructure projects even today, but when an institution comes up backed by the government, they get security and confidence in putting money.

"We expect that regulators will increase the cap on investments," he said.

Market-driven emoluments would be given to managing directors and deputy managing directors of the proposed DFI to attract "best" of talents, Sitharaman said.

"We are looking at higher age limit and longer tenure for MDs of DMDs. With these professional human resource, I think this organisation will immediately and quickly rise to the expectations of the market," she said.

DFI board would be empowered to appoint and remove wholetime directors, the finance minister said.

Soumitra Majumdar, partner at J Sagar Associates, said," On the liability side, DFI should be permitted to access all forms of long term capital, domestically as well as internationally. The bank needs to be manned by finance and sector experts, for effective monitoring of the projects.”

Mathew Chacko, partner at Spice Route Legal, said the move probably came ten years late, but better late than never.

The government had earlier come out with the National Infrastructure Pipeline following recommendations by a taskforce. The pipeline laid the roadmap for 7,671 infrastructure projects, costing $1,919.05 billion during 2018-19 to 2024-25. Of these, work on 1766 projects has started.

The country is facing issues with funding of infrastructure projects with banks drawing shorter term funds than the requirements of long gestation works which leads to asset-liability mismatch. The country did not have all embracing DFI though many sector specific ones such as Indian Railway Finance Corporation, National Bank for Agriculture and Rural Development, and the Small Industries Development Bank of India are there.

After 2000-2001, the prominence of development banking started to decline as many firms from development banking had quit post liberalisation. During 2002-2004, ICICI and IDBI were turned into commercial banks.