The Hindu Business Line : Dedicated infrastructure funds: Long-term commitment sought

Tough norms
Investments in such funds should be for a longer period of minimum seven years
Exposure to listed companies, however, should be limited to 10 per cent of the NAV
DIFs can be launched by all SEBI registered AMCs, but should have a dedicated team

Our Bureau

Mumbai, Aug. 6 A SEBI-appointed committee has suggested that dedicated infrastructure funds (DIFs) by mutual funds should be closed ended schemes with a minimum maturity of seven years largely investing in unlisted companies.

The committee has also suggested that the proposed DIFs should get listed on the stock exchanges within 24 months of the launch of the scheme and be allowed to buy back within certain limits to safeguard the interest of investors.

The committee headed by Mr U.K. Sinha (Chairman and MD – UTI AMC), was of the view that since infrastructure projects have long gestation periods, investments in such funds should be for a longer period of minimum seven years and a possibility of one or two extensions.

Seeks tax benefits

Considering the long-term and close-ended nature of the proposed DIFs, the Committee believes that it will be important to provide some tax incentives to retail investors to motivate them to invest in DIFs. Tax benefits may be provided by (i) enhancement of limit under Section 80C from Rs 1 lakh to Rs 2 lakh with the incremental limit exclusively set apart for investment in designated infrastructure funds and (ii) Capital gains arising on account of transfer of long term capital assets may be exempted from tax if the capital gains amount is invested in DIF units for a period of 7 years. However, such tax benefits should be available only to the original investors.

In terms of investments, it has been suggested that the DIF’s may be allowed to invest up to 100 per cent of its funds into unlisted securities including both equity and debt instruments. Exposure to listed companies, however, should be limited to 10 per cent of the NAV at the time of making the investments.

Further, the DIF’s may be allowed to take control of the asset, if they so desire, and own up to 100 per cent of the paid-up capital of a company.

The DIF’s can look to exit the investments through strategic sale, IPO’s, buyback agreements, etc.

Mutual Funds should be allowed to charge an additional one per cent fees above the current expense ratio borne by them. Committee therefore suggests that maximum overall permissible expense ratio for them.

NAV declaration

The DIFs should report the fund net asset value at the time of each asset valuation and also at quarterly intervals.

The proposed DIFs should engage an approved consultant to value the assets semi-annually. Such an approved list can be drawn up by the SEBI registered rating agencies.

The Committee has proposed that the DIFs can be launched by all SEBI registered AMCs, but should have a dedicated team for managing the funds and their trustees should be satisfied in this respect.

The Committee suggests that all the individual/ companies/corporates/ institutions and FI’s should be eligible for making investment in such mutual funds. Also, it has been recommended that government and regulators should allow insurance companies and pension funds should be allowed to invest in these schemes.

The committee was set up post the Finance Minister’s announcement in the budget speech for 2007-08 that mutual funds should be permitted to launch and operate dedicated infrastructure funds to promote the flow of investment to the infrastructure sector.

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