In a move aimed to substantially increase the flow of funds into the cash-starved infrastructure sector, state-owned India Infrastructure Finance Company Ltd (IIFCL) is likely to stand as a guarantor to bonds issued by private infrastructure companies. The proposal is likely to be announced by finance minister P Chidambaram in the budget to be presented next week.
Following the announcement, IIFCL will announce setting up of a $500-million fund to provide guarantees for such specified bonds of infrastructure companies, said government officials.
The mechanism will serve as a catalyst to channel large inflows towards infrastructure projects. Besides, these guarantees will help in raising the credit rating of bonds being issued by infrastructure companies, thereby enabling them to attract insurance and pension funds, household savings and foreign debt.
The corpus of this fund could be raised further to $1 billion or more, depending on the demand, said officials. The initiative should help enhance the flow of credit to supplement bank financing, which is facing pressure in terms of exposure and headroom.
At present, IIFCL lends for up to 20% of the approved project cost. It is proposed that IIFCL should use the same exposure for guaranteeing bonds of infrastructure companies in order to raise their credit rating to "AA" or "AAA".
"With its experience in infrastructure financing, IIFCL is well suited to provide guarantees for bonds to be issued by private infrastructure companies. Infrastructure companies will be enabled to issue long- term bonds guaranteed by IIFCL, thereby enhancing the flow of long-term debt for infrastructure projects," a top government official said.
The government plans to double infrastructure investment from R20 lakh crore to R40 lakh crore ($1 trillion) over the next five years.