Coming soon: Tax, other fiscal sops for development financial institution

KR Srivats New Delhi | Updated on March 04, 2021

DFI is typically a financial institution that aims to provide risk capital for economic development projects on a non-commercial basis.

On the cards are 20-year tax holiday, refund of hedging costs, among others

The proposed new Development Financial Institution, called the National Bank for Financing Infrastructure and Development (NABFID), will get a package of tax incentives, concessions, government guarantees and grants to ensure a smooth journey for the institution.

The Centre plans to go all out in terms of fiscal support and is readying a package of incentives, including a 20-year Income-Tax holiday, assured reimbursement for hedging cost on foreign borrowings by the DFI, sovereign guarantee on loans extended by the DFI to a borrower, besides concessional rate of fees (not exceeding 0.1 per cent) for government guarantees extended to the institution for borrowings, said official sources.

The Centre may also pump in ₹5,000 crore as cash or marketable securities in NABFID within one year from the date on which the entire undertaking of state-owned India Infrastructure Finance Company Ltd (IIFCL) stands vested with the new DFI. The National Bank for Financing Infrastructure and Development Bill 2021 will provide for the merger of IIFCL into the DFI. It is expected to be introduced and passed in the second leg of Budget session starting March 8.

Structure and working

The structure and working envisaged for NABFID have many firsts. The government is looking to provide for a structure where equity shares of NABFID, a body corporate, would be entirely owned by the Centre, with an authorised capital of ₹1 lakh crore, to begin with.

The Bill is also likely to provide that shares of the NABFID can be held, besides the Centre, by multilateral institutions, sovereign wealth funds, pension funds, insurers, financial institutions, banks and “any such institutions” (to be prescribed by the Centre). It is also expected to provide that the Centre shall hold at least 26 per cent of the shares of NABFID at all times.

A cursory reading of this may lead critics to scoff at the proposed move, as this could lead to private capital being legally allowed to take stake in the NABFID. Nowhere in the world has private capital been allowed by a country to take controlling interest in a DFI, and any such move would be a retrograde step for India, some observers may argue.

RBI licence

Indications are that the proposed Bill will have a specific provision that will allow anyone who wants to establish any other DFI, other than NABFID, to directly apply to the Reserve Bank of India (RBI) for licence. The RBI can, in consultation with the Centre, grant such a licence and the private-controlled DFI will be under the regulatory oversight of the RBI, sources said.

The Centre looks open to the idea of diluting its stake in NABFID even up to 26 per cent, from the 100 per cent shareholding envisaged now, say economy watchers. Butone would have to wait for the actual NABFID Bill to see the fine print, they added.

The Bill also proposes specific provisions in law that will ring-fence the commercial decisions of the top brass, directors and employees of NABFID from any inquiry or enquiry by investigative agencies, including the Central Bureau of Investigation, Serious Frauds Investigation Office and Enforcement Directorate. No investigation can be conducted without the approval of the Central government where the offence is alleged to have been committed by the chairperson or other directors.

Also, the Bill may have specific provision that will protect the action taken in good faith by the Chairman, Director and employees’ of NABFID, sources said.

Published on March 04, 2021

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