Projects like Smart Cities, Dedicated Freight Corridors, High-speed railways etc require huge, long-term investment. From where does this money come from? Government of India had announced setting up of National Investment and Infrastructure Fund (NIIF) in 2015 budget. The fund was eventually set up in December 2015. The Fund aims to attract investment from both domestic and international sources.
Issues with infrastructure sector
• The sector needs long term finance; but banks are helpless: One of the fundamental reason why Indian infrastructure is still not up to desired level is the lack of long term finance. This is despite the fact that 10.4% of bank lending was channelled to Infrastructure in 2015.
• But of late, the banks in India especially the public sector banks are reeling under the pressure of Non-Performing Assets and Stressed assets, combing around 4.5% and 11% respectively.
• This has forced the banks to confine themselves to a shell and not commit themselves to long term financing portfolios and projects with long gestation periods.
• It is in light of this fund crunch situation that the Government of India announced setting up of National Investment and Infrastructure Fund in 2015 budget.
• The NIIF through its pass-throughs, such as the National Housing Bank and the IRFC, will fund for a longer window of 20 years or more.
National Investment and Infrastructure Fund (NIIF)
• To make it simple, National Investment and Infrastructure Fund (NIIF) is a fund created by the Government of India for enhancing infrastructure financing in the country.
• Securities and Exchange Board of India (SEBI) has already approved NIIF as an alternate investment fund.
• The National Investment and Infrastructure Fund (NIIF) Limited has been incorporated as a company under the Companies Act, 2013, duly authorized to act as investment manager of National Investment and Infrastructure Fund.
• The government will invest Rs 20,000 crore into the NIIF from the Budget, with another Rs 20,000 crore expected to come from private investors.
• The government’s share of the NIIF’s corpus is envisaged to be under 50%.
NIIF as fund of funds
• NIIF is a fund of funds. So there will be multiple alternate investment funds underneath.
• There could be a stressed-assets fund, renewable energy fund, brownfield projects fund – sponsored by the NIIF.
How does this work?
• With the corpus of Rs 40K crore the Trust would be able to raise debt.
• NIIF would raise funds upto 10 times the corpus or up to Rs 2 lakh crore on a long-term basis.
• It can invest in equity through infrastructure finance companies such as IRFC(Indian Railway Finance Corporation) and NHB(National Housing Bank).
• The infrastructure finance companies can then leverage this extra equity, manifold.
National Investment and Infrastructure Fund (NIIF): What will it do?
1. Equity (capital) to Non-Banking Financial Companies (NBFCs)/Financial Institutions (FIs) that are engaged mainly in infrastructure financing. These institutions will be able to leverage this equity support and provide debt to the projects selected.
2. Invest in funds engaged mainly in infrastructure sectors and managed by Asset Management Companies (AMCs) for equity / quasi-equity funding of listed / unlisted companies.
3. Provides fund directly to commercially projects, both Greenfield and brownfield, including stalled projects. A government official said some key transportation projects could be taken up initially by the NIIF for funding.
• Greenfield: a Greenfield project is one that lacks constraints imposed by prior work. Simply means: a new project.
• Brownfield: it is a term used to describe a land previously used for industrial purposes or some other uses. Brownfield project simply means: an already existing/ stalled project.
NIIF working in a nutshell:
• The fund is to be set up as a Trust. It is registered with SEBI as Category II Alternative Investment Fund (AIF) on December 28, 2015. (Read ahead on different categories of AIF)
• NIIF would raise funds by issuing offshore credit enhanced bonds and also tap into anchor investors.
Anchor investors or cornerstone investors are marque institutional investors like sovereign wealth fund, mutual fund etc.
Sovereign wealth fund: a state owned fund.
• The fund thus developed will be used to finance Indian infrastructure financing companies like the IRFC (Indian Rail Finance Corporation), NHB (National Housing Board) etc.
• The fund thus received by these companies is then channelled to their respective niche areas (railways and Housing respectively in this case), thus increasing the investment into these sectors manifold.
• Thus fundamentally NIIF is a Banker (NIIF) of the Banker (e.g.: NHB) of the Banker (e.g.: Housing loans).
• Maximize economic impact of each Rupee spent.
• Mainly through infrastructure development in commercially viable projects, both Greenfield and brownfield, including stalled projects.
• It could also consider other nationally important projects, for example, in manufacturing, if commercially viable.
Functions of NIIF
1. Fund raising through suitable instruments including off-shore credit enhanced bonds, and attracting anchor investors to participate as partners in NIIF;
2. Servicing of the investors of NIIF.
3. Considering and approving candidate companies/institutions/ projects (including state entities) for investments and periodic monitoring of investments.
4. Investing in the corpus created by Asset Management Companies (AMCs) for investing in private equity.
Preparing a shelf of infrastructure projects and providing advisory services.