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While I understand it as some sort of funding mechanism for infrastructure projects, why is it called a "debt" fund? And how does that work? How is it any different from other funds say - loans?
It is called a debt fund because it is constituted for the purpose of investing in DEBT securities of infrastructure companies or PPP projects.
DFs can be set up either as a company or as a trust. A trust based IDF would normally be a Mutual Fund (MF) that would issue units while a company based IDF would normally be a form of NBFC that would issue bonds. Further, a trust based IDF (MF) would be regulated by SEBI; and an IDF set up as a company (NBFC) would be regulated by RBI
One major problem faced by banks while disbursing loans to infrastructure projects is the asset liability mismatch inherent with these projects. Therefore many such projects are denied financing by banks. In case of an IDF that issues bonds, credit enhancement inherent in Public Private Partnership (PPP) projects would be available.Such projects would involve a lower level of risk and consequently a higher credit rating
Copied from arthspedia. Thanks for asking this question. I also understood some points missing.
Devil, thanks a lot for answering this question. I am slowing getting to understand the concept.
Let's take an example and work out. (Pls correct if there is any I am just trying to understand how it all works) 1) Takes investment from the IDF by issuing debt security bonds to the IDF? 2) Then IDF can issue those bonds to the public so that it could be traded? 3) If the infrastructure project is successful - all is well and good, and the bond holders can claim the money at the end of the period by producing bonds. 4) If the project fails, then the bond holders lose money and of course - they have the bond, so the procedure to settle their claims would be taken according to the rules? 5) So, here instead of making one entity responsible(say the banks/venture capitalists/...) we are distributing the securities to people and distributing the profits/losses, that way a single entity is not at loss(if it happens) - essentially a crowd investing model similar to share market, with the added advantage of holding bonds?
Am I right in my assessment above on how the IDF works?
I think you are correct. One thing to remember is-
An IDF-MF would raise resources through issue of rupee denominated units of minimum 5 year maturity and an IDF-NBFC would raise resources through issue of either rupee or dollar denominated bonds of minimum 5 year maturity
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Comments
DFs can be set up either as a company or as a trust. A trust based IDF would normally be a Mutual Fund (MF) that would issue units while a company based IDF would normally be a form of NBFC that would issue bonds. Further, a trust based IDF (MF) would be regulated by SEBI; and an IDF set up as a company (NBFC) would be regulated by RBI
One major problem faced by banks while disbursing loans to infrastructure projects is the asset liability mismatch inherent with these projects. Therefore many such projects are denied financing by banks. In case of an IDF that issues bonds, credit enhancement inherent in Public Private Partnership (PPP) projects would be available.Such projects would involve a lower level of risk and consequently a higher credit rating
Copied from arthspedia. Thanks for asking this question. I also understood some points missing.
Let's take an example and work out. (Pls correct if there is any I am just trying to understand how it all works)
1) Takes investment from the IDF by issuing debt security bonds to the IDF?
2) Then IDF can issue those bonds to the public so that it could be traded?
3) If the infrastructure project is successful - all is well and good, and the bond holders can claim the money at the end of the period by producing bonds.
4) If the project fails, then the bond holders lose money and of course - they have the bond, so the procedure to settle their claims would be taken according to the rules?
5) So, here instead of making one entity responsible(say the banks/venture capitalists/...) we are distributing the securities to people and distributing the profits/losses, that way a single entity is not at loss(if it happens) - essentially a crowd investing model similar to share market, with the added advantage of holding bonds?
Am I right in my assessment above on how the IDF works?
Thanks a lot.
An IDF-MF would raise resources through issue of rupee denominated units of minimum 5 year maturity and an IDF-NBFC would raise resources through issue of either rupee or dollar denominated bonds of minimum 5 year maturity
http://mrunal.org/2012/12/economy-infrastructure-debt-funds-idf-withholding-tax-epfo-angle-meaning-concept-explained.html
http://www.gktoday.in/infrastructure-debt-fund-2/