Infrastructure debt fund schemes

Roads, ports and power plants need money that stays put for fifteen years. Banks lend it, but a bank funds long assets with short deposits, and there is a limit to how much of that mismatch any system can carry.

An infrastructure debt fund scheme is a mutual fund scheme designed to take some of that paper off the banks and hold it for investors instead. The regulation does not merely permit infrastructure lending — it requires it, and then spends most of its length making sure the scheme does not become a dumping ground for the sponsor's own exposures.

The 90% floor. An infrastructure debt fund scheme means a mutual fund scheme that invests primarily — a minimum of 90% of scheme assets — in the debt securities or securitised debt instruments of:

• infrastructure companies;
• infrastructure capital companies;
• infrastructure projects;
• special purpose vehicles created to facilitate or promote investment in infrastructure;
• other permissible assets under the regulations; or
• bank loans in respect of completed and revenue generating projects of infrastructure companies, projects or SPVs.

The balance. The remaining assets may go into equity shares and convertibles, including mezzanine financing instruments, of companies engaged in infrastructure or infrastructure development projects — listed or not — or into money market instruments and bank deposits.

The concentration cap. Investment in the debt instruments or assets of any single infrastructure company, project or SPV must not exceed 30% of net assets.

The related-party wall. The scheme may not invest at all in any unlisted security of the sponsor, its associate or group company, or in any listed security issued to them by preferential allotment. Listed securities of the sponsor group, or bank loans of the sponsor group's completed and revenue generating projects, are capped at 25% of net assets, and even then only with trustee approval and full disclosure to investors.

Assets or securities owned by the sponsor, the AMC or their associates are capped at 30% of net assets, and all three of the following must hold: the investment is not below investment grade; the sponsor or its associates retain at least 30% of those assets or securities for as long as the scheme holds them; and the trustees approve with full disclosure to investors.

Deccan Infrastructure Debt Fund Scheme has net assets of Rs 2,000 crore.

Debt and securitised debt total Rs 1,840 crore = 92% of net assets. The floor is met with 2 percentage points to spare.

Now the fund manager proposes adding Rs 180 crore of NCDs of Konkan Expressway SPV, of which the scheme already holds Rs 460 crore. New exposure would be Rs 640 crore = 32% of net assets — over the 30% single-borrower cap by Rs 40 crore. The trade must be cut to Rs 140 crore or dropped.

Separately, the sponsor offers the scheme Rs 560 crore of listed bonds of a group infrastructure company. That is 28% of net assets, above the 25% ceiling on listed sponsor-group securities. Trustee approval cannot cure it: the 25% is a hard limit, and trustee approval plus disclosure is a condition inside the limit, not a way past it. The most the scheme can take is Rs 500 crore — and only with the trustees' approval on record and full disclosure to investors.

Chapter 14, section 14.5.2 (Infrastructure Debt Fund Schemes), sitting immediately after real estate mutual fund schemes — the two specialised scheme types are usually examined as a pair, precisely because their percentages differ.

Expect a direct recall question on the 90% minimum and the 30% single-issuer cap, and a harder one on the sponsor-related limits: 25% for listed sponsor-group securities and bank loans, 30% for assets or securities owned by the sponsor, AMC or associates, with the investment-grade, 30%-retention and trustee-approval conditions attached.

• 90% is the floor for the scheme, 30% is the ceiling for one borrower. Both are percentages of net assets and both get swapped in questions.
• Bank loans qualify only for completed and revenue generating projects. A loan to a project still under construction does not count toward the 90%.
• 25% and 30% are different sponsor limits. 25% applies to listed securities of the sponsor group and their project bank loans; 30% applies to assets or securities owned by the sponsor, AMC or their associates. Unlisted sponsor securities and preferential allotments to the sponsor group are barred outright — no percentage at all.
• The sponsor must retain at least 30% of any asset the scheme buys from it, for as long as the scheme holds it. Skin in the game is a condition of the deal, not an afterthought.
• "Primarily" is defined here. In ordinary regulatory drafting "primarily" is vague; in this definition it is spelled out as a minimum of 90%, so do not answer "a majority".
• Do not confuse this with a plain debt scheme, which has no infrastructure mandate, or with an Infrastructure Investment Trust, which is a listed trust under a separate set of regulations.