THE INFRASTRUCTURE POLICY

INFRASTRUCTURE POLICY




Till the advent of economic reforms, Indian infrastructure was dominated by public sector agencies and government departments. The nine sectors covered in this brochure accounted for approximately Rs 1,930 billion (US$ 55 billion), or 44 per cent of the investment outlay in the country's just-concluded Eighth Five-year Plan (1992-1997). But by current estimates, inclusive of the investment backlog in areas like urban services, the investment needed in the infrastructure sector over the next decade to support an annual GDP growth rate in the range of 7 to 8 per cent is around Rs 15,000 billion (US$ 429 billion)



The long-term dimension of this massive investment programme deserves special note, as also the robust growth potential demonstrated by several infrastructure sectors. Power generation, for instance, has increased annually at the rate of 7 to 8 per cent both over the very long term and the first four years of the reform phase. Electricity consumption per capita is however less than one-tenth the global average. Basic telephone connections have grown annually at 10 to 22 per cent over the last decade; but penetration ratio is still low at 1.5 per 100 population as compared to the global average of 10 per hundred. The need to accelerate infrastructure development therefore presents enormous opportunities for the investor. Approval procedures for projects in various sectors are outlined in the relevant chapters of this brochure.



Approval limits relaxed



Among the earliest measures taken in the wake of economic liberalisation was the simplification of procedures for approving foreign investments.



There are sector-specific ceilings on foreign equity. In power projects, for instance, foreign shareholding can be 100 per cent. Ceilings ranging from 40 to 74 per cent are applicable to other sectors. There are also specified sectorwise limits eligible for automatic approvals. The RBI grants automatic approvals normally within two weeks of filing applications.



Foreign investment proposals which do not fulfil any or all of the parameters prescribed for automatic approval, are considered for approval, on their merits, by the FIPB. Composite proposalsthose seeking other industrial approvals like industrial license or technical collaborations along with approval for foreign investmentare given composite clearance by the FIPB.



The Secretariat for Industrial Assistance (SIA) in the Ministry of Industry is responsible for processing all applications requiring FIPB approval. The SIA places all proposals before the FIPB within 15 days of receipt.



Tax incentives



Financiers Keeping in view the large volumes of investments and long gestation periods that characterise infrastructure projects, various tax concessions are available to institutions engaged in their financing. Forty per cent of the profits that long-term financing institutions make through infrastructure financing is tax-exempt, subject to specified conditions. Venture capital funds investing in power or telecommunications projects are exempted from taxes on dividend income and long-term capital gains. Infrastructure capital funds do not have to pay income tax on dividend or interest income, or long-term capital gains.



Operators A five-year tax holiday followed by deduction of 25 per cent (30 per cent in case of companies) for the next five years is provided to BOOT/BOT projects in the following areas: power, roads, highways, bridges, airports, ports, rail systems, water supply, irrigation, sanitation and sewerage systems. Similar deductions have been proposed for the telecom sector.



The Finance Bill, 1997 has proposed to allow amortisation of license fees paid by telecom operators over a specified period.



Revenues earned by non-resident oil service companies through providing services used in extraction or production of mineral oils are taxed at a deemed profit of 10 per cent of their gross revenues. The same applies to foreign companies engaged in constructing, erecting, testing or commissioning of plant and machinery for turnkey power projects approved by the Government and financed under an international aid programme.



Capital market investors Investments in shares, debentures, bonds of public companies engaged in infrastructure services or units of mutual funds subscribing to these securities upto a ceiling of Rs. 70,000 get a 20 per cent tax rebate.



Exemption from capital gains tax is allowed if the whole of the net consideration received on transfer of the capital asset is invested in infrastructure sector securities for a period of three years, or the capital gains are invested similarly for a period of seven years.



Other measures



The Central Government has, over the last one year, taken several fiscal and capital market-related measures designed to channel private investments into infrastructure sectors.



In December 1996, the Government allowed automatic approval of foreign equity participation upto 74 per cent in key infrastructure industries such as electricity generation and transmission, non-conventional energy generation and distribution, and construction activities in the area of roads, bridges, railbeds, ports and harbours.

The list of industries in which automatic approval is granted for foreign equity upto 51 per cent has been expanded to include support services to land transport, like operation of highway bridges, toll roads and vehicular tunnels; support services to water transport like operation and maintenance of piers, loading and discharging of vessels; and miscellaneous services for transport such as cargo handling for land, water and air transport; renting and leasing of transport equipment and vehicles without operators.

FIIs were earlier unable to invest in infrastructure because most infrastructure projects are set up by companies which are not expected to be listed for some time. They are now permitted to invest in unlisted companies in the same manner as in listed companies.

To facilitate public issues for capital-intensive infrastructure projects, SEBI guidelines have been amended to provide that in issues where the promoters' contribution exceeds Rs 1 billion (US$ 28.6 million), they can bring in their contribution in a phased manner: 50 per cent before the issue opens and the rest before the calls are made on the public, instead of bringing in the entire amount before the public issue opens (which is the requirement in case of promoters' contribution being below Rs 1 billion).

Companies had to have their equity listed before they could get their debt instruments listed. Infrastructure projects normally have long gestation periods and therefore, any issue of shares for such projects may be unattractive to the investor since he may not get immediate returns in the form of dividends or share price appreciation. SEBI has therefore recently advised all stock exchanges to amend their listing requirements so that companies can get their debt instruments listed without their equity being listed first.

There are significant import duty concessions available on equipment and raw material being imported by projects in several infrastructure sector like power, mining, oil, exploration, port and road development.

Duty structures on project imports have been progressively rationalised.

Institutional initiatives



The Infrastructure Development Finance Corporation (IDFC) is being established to provide long-term finance for the infrastructure sector. The IDFC was incorporated on January 30, 1997, with an authorised share capital of Rs 50 billion (US$ 1.4 billion). Among other things, the IDFC will act as a direct lender, a refinancing institution and a provider of financial guarantees.



In the telecommunications sector, the Government now allows the setting up of investment or holding companies with majority ownership and management with Indian shareholders to invest in a licensee or operating company which faces a foreign equity limit. This investment will be treated as domestic equity, irrespective of the foreign equity stake in the investment or holding company.



The Asian Development Bank (ADB) has announced that it will provide US$300 million to support private sector infrastructure projects through long-term debt. The money will be borrowed by the Industrial Development Bank of India (IDBI) and the Industrial Credit and Investment Corporation of India (ICICI) for on-lending to infrastructure companies through long-term debt instruments for a minimum maturity period of 15 years. This loan will support the introduction of long-term debt instruments in the Indian capital markets for financing projects which require long-maturity debt.



The funds will be on-lent to infrastructure project entities against the creation of bonds and debentures, which can be traded in the secondary market after project commissioning. Funds received by the institutions from these secondary transactions will again be deployed to create fresh 15-year debentures for other project entities.



ECBs for infrastructure



Infrastructure projects have been permitted to avail of ECB to the extent of 35 per cent of total project cost. Greater flexibility may be allowed to power projects. Recently the ECB limit for the telecommunications sector was raised to 50 per cent of total project cost.

The Union Finance Ministry is contemplating raising the ECB ceiling for companies involved in ports, highways and mining also to 50 per cent of total project cost.



Almost all infrastructure projectstelecom, power, railways, mining, urban infrastructure, roads, ports, industrial parkshave been permitted to use ECB for financing project-related rupee expenditure, in addition to meeting foreign currency capital expenditure.

Telecommunications and oil exploration and development (excluding refining) companies have been permitted to raise external commercial loans with a minimum average maturity period of five years instead of seven, even for borrowings exceeding US$15 million.

Holding companies and promoters have been allowed ECB upto the equivalent of US$50 million to finance equity investment in a subsidiary company implementing infrastructure projects. This flexibility aims to enable domestic investors in infrastructure projects to meet the minimum domestic equity requirements.

The newly created Investment Promotion and Infrastructure Development Cell in the Ministry of Industry will arrange the facilitation and monitoring of investments and co-ordination of infrastructural requirements.



The functions of the Cell are :






Promotion of private investment including foreign investment in the infrastructure sector;


Liaison with state governments regarding investment promotion; and


Coordination of progress of projects approved for investment or technology transfer.

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