In a budget that signals far-reaching changes for the debt market, the finance minister has paved the way for newer investment options in the infrastructure space, including zero coupon bonds issued by specified infrastructure debt funds.

The government, which has outlined a raft of proposals for infrastructure financing, will effectively usher in fresh investment opportunities for those who seek income along with stability. A debt security bearing an investment-grade rating does offer both elements to its investors.

The authorities have lined up a three-pronged strategy on this front-creation of institutional mechanisms, monetisation of assets and ensuring higher capital expenditure in budgets, both state and central. Such an approach is in keeping with the existing policy on creating a viable market for debt securities, aimed at funding infrastructure projects.

The government, which has over recent years lined up innovative means of financing, is keen to reinforce the debt market. Its initiatives have included the creation of exchange traded funds with central public sector enterprises (CPSEs).

National Infra Pipeline

Among the proposals that have captured my attention is the National Infrastructure Pipeline (NIP), which has grown to 7,400 projects at this juncture. More than 200 of these (worth Rs 1.10 lakh crore) have been completed under major ministries so far.

NIP, rolled out with 6,835 projects, is the most ambitious exercise of its kind taken up by the policy makers till date. Its success will necessitate a marked increase in funding from both the government and the financial services sector. As for actual debt financing, the FM has referred to the creation of a development financial institution, which will act as a “provider, enabler and catalyst”.

In the pipeline is a bill to set up such a DFI, for which Rs 20,000 crore has provided. The idea here is to arrange a lending portfolio of Rs 5 lakh crore over three years.

The other interesting proposal relates to infrastructure investment trusts and real estate investment trusts. Thanks to legislative changes, debt servicing by foreign portfolio investors (FPIs) will be allowed here, and FPIs, henceforth, will find it easier to access funds.

While the proposed DFI and the two kinds of trusts are really the domain of institutions, it remains to be seen whether smaller and more ordinary investors can take part in the debt market in an organised (and more cost-efficient) manner. All kinds of investors, big and small, should be able to participate in its growth, and no market should be the sole reserve of the big players.

Zero Coupon Bonds

The budget has cited the issuance of ZCBs by infrastructure debt funds, an instrument that I believe can well pack a lot of punch in today’s investment space. The probability of involving a tax benefit for ZCB holders will make the proposal significant.

The use of such bonds will improve the chances of sourcing the right kind of finance. This will also be in sync with the need for innovative financing options. The latter are seen to be particularly necessary in cases involving strategic disinvestment.

The government has, as the FM noted, intends to complete disinvestments in a clutch of well-known central undertakings in the months ahead. Among these are Air India, Shipping Corporation, Container Corporation and Neelachal Ispat Nigam. It is working on a similar proposal for IDBI Bank too, but that is likely to be a somewhat different strategy.

• Nilanjan Dey is director of Wishlist Capital Advisors