Infrastructure Fund

A road, a port or a transmission line takes years to build, produces nothing at all while it is being built, and then produces a long, slow, fairly predictable stream of cash for decades. That shape suits almost no ordinary investor, which is why it needs a vehicle of its own.

An infrastructure fund is the Category I AIF built for it. It invests primarily in unlisted securities, partnership interest, or listed debt or securitised debt instruments of investee companies or special purpose vehicles engaged in or formed for operating, developing or holding infrastructure projects.

Being Category I is the point: the government and the regulators treat infrastructure as economically desirable, which is what puts the fund in the category that attracts incentives.

The binding rule is a floor, not a ceiling:

• At least 75% of investable funds must go into unlisted securities, units or partnership interest of VCUs, investee companies or SPVs engaged in or formed for operating, developing or holding infrastructure projects — or into units of Category II AIFs that themselves invest primarily in such companies.
• Notwithstanding that restriction, an infrastructure fund may also invest in listed securitised debt instruments or listed debt securities of those same investee companies or SPVs. This is the carve-out that lets an infrastructure fund hold the listed project bond it would otherwise be barred from.

The general Category I rules still apply on top: investment only in investee companies, VCUs, SPVs, LLPs, units of other Category I AIFs of the same sub-category or scheme, or units of Category II AIFs; no borrowing or leverage for making investments except to meet temporary and day-to-day funding needs for not more than 30 days, on not more than 4 occasions a year, and not more than 10% of investable funds, with a 30-day cooling-off between two borrowing periods counted from the date the previous borrowing was repaid.

The workbook is candid about who actually operates here: mostly sovereign wealth funds, multilateral funds and sector-focused AIFs, because of the high illiquidity, the long gestation risk in project implementation, the long amortisation of the debt and the lower equity returns from such SPVs.

Deccan Infrastructure Fund I, a Category I AIF, closes a scheme with investable funds of Rs 1,500 crore.

The 75% floor means at least Rs 1,125 crore must sit in the qualifying bucket. The manager builds:

At Rs 1,160 crore, or 77.3%, the fund clears the floor with Rs 35 crore of headroom. The Rs 210 crore of listed project debt is allowed not because it counts in the 75%, but because the second condition expressly permits listed debt and listed securitised debt of the same investee companies and SPVs.

Mid-year, a Rs 60 crore drawdown lands four days late. The fund borrows Rs 60 crore for 11 days — inside 30 days, within the 10% of investable funds cap (Rs 150 crore), and its first such borrowing of the year. It repays on day 11, and cannot borrow again until day 41.

Chapter 2 defines the fund at 2.3.7 and Chapter 4 gives its investment conditions at 4.1.10, immediately after the general Category I conditions. The high-yield questions are the 75% of investable funds floor, the permission to hold listed debt and listed securitised debt of the same investee companies, and the Category I borrowing limits — 30 days, 4 occasions, 10% of investable funds, 30-day cooling-off — which are asked against infrastructure funds as readily as against any other Category I sub-category.

• 75% is of investable funds, not of the corpus. Investable funds are the corpus net of the expenses and fees chargeable to the scheme, so the two numbers are never equal.
• Infrastructure funds are Category I; InvITs are not AIFs at all. An Infrastructure Investment Trust is a separate listed vehicle under its own regulations. A question that mentions listed units and retail investors is about an InvIT.
• The listed-debt permission is an addition, not part of the 75%. Read the "notwithstanding" clause as opening a door, not as widening the floor.
• Units of Category II AIFs count towards the 75% only where those AIFs invest primarily in the qualifying infrastructure companies or SPVs.
• The borrowing allowance is for temporary and day-to-day needs, not for leverage. Category I AIFs cannot borrow to make investments, full stop.
• Do not confuse this with the National Investment and Infrastructure Fund, which is a specific fund, not a sub-category.