Slew of measures to boost core financing

The Union government and the regulators RBI, Sebi and Irda will be implementing quite a lot of the recommendations of the Deepak Parekh committee on infrastructure financing in the next few weeks, as they have agreed to act upon as many as 15 of them, after deliberations here in the past couple of weeks, official sources told ET. The government and the regulators have resolved to keep an open mind on a few more recommendations of the committee while putting some in abeyance owing to lack of consensus.

The policy measures on the anvil will broadly aim at increasing the exposure of banks, insurance companies and NBFCs to the infrastructure sector and bolstering the corporate bond market.

Sources said during the deliberations, Irda has agreed to act upon the Parekh committee’s proposal to allow insurance companies invest in the capital-raising instruments of infrastructure companies even if the instruments are just investment grade (BBB-). Currently, as per Irda guidelines, insurance firms can invest only in instruments with AA rating. There was also an agreement on allowing NBFCs to raise foreign currency borrowings for on-lending to the infrastructure sector.

According to the sources, government and Sebi have appreciated the need to create a deep and robust debt capital market to make available long-term debt instruments for the infrastructure sector, which is estimated to require funds to the tune of $475 billion (at current prices) in the next five years. TDS on corporate bonds is likely to be removed. Sources said it has also been decided to allow repo transactions on corporate bonds in inter-bank repo market.

Currently, investors not required to pay the withholding tax (TDS) are finding it difficult to sell bonds to insurance firms and mutual funds who are not subject to the tax. This hampers the development of the bond market. Earlier, the revenue department had taken a view against the proposal to remove TDS on corporate bonds. Sources said that since the revenue implication is notional now and merely futuristic, there is now an agreement to act upon this proposal.

However, sources said, the committee’s proposal to reduce the tax on capital investment in unlisted equity shares of infrastructure companies hasn’t curried favour with the government. Currently, capital gains from investment in listed equities are subject to a 10% short-term capital gains tax, and there is no long-term capital gains tax. The committee had pointed out that as opposed to this, capital gains from sale of unlisted equity are subject to much high tax rates. But the government has now reckoned that the extant rate of tax on unlisted equity mostly works out to be less than the equivalent capital gains tax.

Government and Sebi have also agreed to increase the efficiency of private placement market for debt by limiting such placement to qualified institutional buyers who, as a class of investors, are knowledgeable of the risks associated with private issues and also by scrapping the 50-investor rule to qualify as private placement.

To remove the disparity between loans and bonds from the regulatory perspective (bond regulations are comparatively more restrictive now), the ban on banks’ exposure to unrated debt and the curbs on their investments in unlisted papers would be reviewed, sources said. RBI has agreed to consider making this relaxation for banks, the sources added. The Parekh committee had noted that the current regulatory asymmetry with a bias against bonds was making banks averse to investing in corporate bonds.