The Reserve Bank of India, on 18 August 2023, issued a revised regulatory framework for Infrastructure Debt Fund-Non-Banking Financial Companies (IDF-NBFCs) through circular RBI/2023-24/54. The revised framework, developed in consultation with the Government of India, expands the operational scope of IDF-NBFCs by permitting external commercial borrowings, withdrawing the mandatory sponsor requirement, and enhancing exposure limits to enable greater participation in infrastructure financing.
Background
IDF-NBFCs were introduced as specialised vehicles to facilitate the flow of long-term debt into infrastructure projects. However, the restrictive regulatory framework governing these entities — including mandatory sponsor arrangements, limited funding sources, and narrow exposure limits — had constrained their growth and utility in India's infrastructure financing ecosystem.
India's infrastructure investment requirement, estimated at over Rs 111 lakh crore under the National Infrastructure Pipeline for the period 2020-2025, necessitated diversification of funding sources beyond traditional bank lending. IDF-NBFCs, with their focus on infrastructure debt refinancing, were positioned to play a complementary role alongside banks and development finance institutions.
The RBI undertook a comprehensive review of the IDF-NBFC framework to harmonise regulations governing infrastructure financing by NBFCs and to enable IDF-NBFCs to play a more meaningful role in channelling long-term capital into the infrastructure sector.
Key Provisions
The revised framework introduces the following changes:
External commercial borrowings permitted: IDF-NBFCs are now permitted to raise funds through external commercial borrowings (ECBs) subject to a minimum tenor of five years. The ECBs must not be sourced from foreign branches of Indian banks, ensuring that the foreign currency borrowing genuinely introduces additional capital rather than rerouting domestic bank funds.
Sponsor requirement withdrawn: The mandatory requirement for an IDF-NBFC to have a sponsor entity (typically a bank or NBFC-IFC) has been removed. Shareholders of IDF-NBFCs will now be subject to the same scrutiny applicable to other NBFCs, simplifying the ownership structure and enabling independent IDF-NBFC setups.
Tripartite agreement made optional: Previously, IDF-NBFCs investing in PPP infrastructure projects were required to establish tripartite agreements with concessionaires and project authorities. This requirement is now discretionary, providing operational flexibility.
Capital requirements: IDF-NBFCs must maintain a minimum Net Owned Fund (NOF) of Rs 300 crore and a Capital to Risk Weighted Assets Ratio (CRAR) of 15 per cent, with a minimum Tier 1 capital of 10 per cent.
Exposure limits: Single borrower exposure is limited to 30 per cent of Tier 1 capital, and single group exposure to 50 per cent, providing adequate diversification buffers while allowing meaningful individual project financing.
Implications for Practitioners
For infrastructure finance practitioners, the revised framework materially improves the viability of IDF-NBFCs as infrastructure funding vehicles. The permission to raise ECBs opens access to international debt markets, potentially reducing the cost of funds and extending the maturity profile available for infrastructure lending.
Corporate law practitioners advising on the formation of new IDF-NBFCs should note that the withdrawal of the sponsor requirement significantly lowers the entry barrier. Independent promoters, infrastructure-focused investment firms, and development finance entities can now establish IDF-NBFCs without partnering with an existing bank or large NBFC.
Project finance practitioners should evaluate the optional tripartite agreement provision as an opportunity to streamline transaction structures for PPP projects, while maintaining the flexibility to use tripartite arrangements where they add genuine credit support.