Cabinet to decide on tax waiver, HQ for new DFI

The Union Cabinet will soon decide on offering tax waiver to the proposed development financial institution (DFI) in the initial years of its operation as well as its headquarters.

The RBI is keen that the DFI is based in Mumbai as it believes that India Infrastructure Finance Company (IIFCL), which will be subsumed into it, is seen to be facing pressure from the finance ministry due to its location in the capital, sources told TOI. FM Nirmala Sitharaman had announced the setting up of the DFI in the Budget and is expected to move the Bill to provide it legislative backing during the current session of Parliament.

The Cabinet will decide on the details and the contentious issues such as a tax holiday over the next few weeks after the revenue department rejected the proposal.

The DFI, government sources insisted, will not be modelled on its predecessors such as ICICI and IDBI, which were converted into banks. The new entity will focus exclusively on financing infrastructure projects.

While multiple options for accessing low-cost funds, for long period, will be outlined by the government at the time the Bill is introduced in Parliament, bonds will be a key element of the strategy and it will channelise long-term investors.

With the Centre holding the entire stake in the institution, at least initially, the government is unlikely to offer it a sovereign guarantee, although the idea is to ensure that the new outfit can access funds at rates available to top-graded or AAA entities, sources said.

Apart from offering services such as project appraisal and long-term finance, a key element will be to help improve the viability of the projects being financed through instruments such as credit enhancement and other tools.

“Banks are not offering long-term loans and the bond market is not developed. Several countries such as Germany, South Korea and China have used the DFI route to finance long-term projects,” said a source, adding that the government has a large pipeline of infrastructure projects that need funding.