IDFC and infrastructure financing

When IDFC was set up in 1997 based on the recommendation made by the Expert Group on Commercialisation of Infrastructure Projects under Rakesh Mohan (1994-96)— there were several sceptics who said in private that it was a classic case of dissipating capital.

IDFC has, over the years, expanded its business footprint and it now has a private equity arm, brokerage and investment banking, a mutual fund, and only the last piece that every finance institution wants to have is a bank within its fold is missing. See private equity in infrastructure:

In march 2003, IDFC private equity closed its first infrastructure-dedicated fund of about $200 million.

IDFC acquired Standard Chartered Bank’s mutual fund (MF) business for $205 million in March this year. This MF will not only help IDFC connect with a retail audience, but it will also have another arm in its fold to raise money and invest. The MF business has very low regulatory barriers, it has low capital requirements and the returns are high. Market penetration by MFs is largely in the top ten cities.

In the case of wholesale funding, IDFC’s borrowings costs are exposed to sharp hikes in interest rates and tightness in market liquidity. Second, its business model has relatively higher portfolio concentrations compared to banks; and third, as a finance company platform, there are limits in leveraging relative to banks.

IDFC is also handicapped by the fact that there is no corporate bond market in India. The tenure of the longest IDFC bond is 10 years, even though there is a 30-year bond issued by the central bank, RBI. IDFC, therefore, willy-nilly lands up borrowing from banks to the extent that they are the biggest subscribers to IDFC’s bonds.

In August 2006, the RBI started regulating IDFC as a non-banking finance company (NBFC) instead of a public financial institution. It further placed a cap of 15% of total funds, on the amount IDFC could lend to a single borrower, which severely limits IDFC's investments in big infrastructure projects.


IDFC also bought 8.2 per cent in National Stock Exchange (NSE) for about $20 million, and within six months of this deal, NYSE, General Atlantic, Softbank and Goldman bought a total of 20 per cent in NSE, valuing the exchange at $2.5 billion.

In February 2007, IDFC also set up a $5-billion fund to finance infrastructure along with Citigroup, India Infrastructure Finance Company (IIFCL) and Blackstone Group. Of this, $2 billion will be in equity capital ($1 billion each in quasi-equity and equity) while $3 billion would be in long-term debt with financing maturities exceeding 10 years.

India continues to set up newer entities for financing infrastructure, but the Middle Kingdom’s State Development Bank of China has been responsible for at least part-funding mega projects: the multi billion dollar Three Gorges Hydel Project, the Beijing-Kowloon Railway and the $3.5-billion Daya Bay Nuclear Power Project in southern China.