Allow pension funds to invest 15% in infra: CFI
The Construction Federation of India (CFI) has asked Finance Minister to permit Pension Funds to invest 10-15% of their funds in Infrastructure projects. It has also sought refinancing of existing rupee loans through External Commercial Borrowings (ECBs) be allowed for such projects from 2009-10.
In addition, the Federation has also demanded that Special Purpose Vehicles (SPVs) should be treated as `deemed listed companies’ and developer/investor be entitled to reduced capital gains tax, if they stay invested for required number of years as per provisions of Income-tax Act.
Besides, it has also pressed for disinvestment of public sector undertakings, proceeds of which should partly be allowed to fund infrastructure augmentation to help India grow and achieve intended growth rate of close to 9% in next 2-3 years.
In the pre-budget memorandum submitted to the Finance Minister by Ajit Gulabchand, president, CFI, it has been argued that infrastructure is a low risk low return sector and therefore pension funds should be encouraged to invest between 10-15% of their funds in such projects just as LIC is allowed to invest in equity.
Gulabchand said that with acceptance of aforesaid suggestion, the government can meet the gap between its current rate of interest rate of 8% on pension funds and actual rate of return. This will also reduce substantially interest liability of government on pension funds.
On the issue of refinancing through ECBs, CFI has pointed out that existing guidelines do not permit domestic companies to refinance existing rupee loans from external sources. It is pertinent to note that the process of raising ECB loans for infrastructure projects is rather lengthy and takes much larger time than that provided in the model concession agreements (typically six months) in various sectors. Additionally, the lower credit rating in the initial years of any project does not allow raising ECBs at effective rates; hence the developer would prefer to raise ECB loans in the later stages of the project and refinance the rupee loans.
The Federation also called for rationalisation of Dividend Distribution Tax (DDT) and recommended that it should be payable at one level only so that cascading effect is minimized. According to it, Infrastructure development business often requires a multi-tier corporate structure with a holding company at the top which is generally a listed entity.
The holding company makes investments in various step-down subsidiaries which are involved in the actual execution of the infrastructure project. The step-down subsidiaries are created so as to comply with either the guidelines set out by agencies like NHAI or the mandates given by the lenders. These step-down subsidiaries pay DDT on distribution of dividends to its holding company, which in turn is required to pay DDT while distributing dividends to its shareholders. This reduces the return of the equity investors in the holding company, making investment in infrastructure sector less attractive.
In order to boost investment in industrial sector, it has further suggested that the benefit should be granted to construction companies if the addition during the year to the net block of assets plant and machinery exceeds by 25% of the value of the net block of plant and machinery of the preceding year.
The CFI also calls for separate treatment for infrastructure holding companies as as a separate class of NBFCs and exempt them fro the restrictions imposed on usual NBFCs. The memorandum has also pressed for allow 200% of expenditure on training and skill enhancement as tax deductible expenditure which will incentivise the spending on training.
It was also very important in the current context to advance the investment target for infrastructure. The Eleventh Five-Year Plan (2007-2012) envisaged that infrastructure investment will reach 9% of GDP by 2012. However in the interim budget this was postponed to 2014. Recent signs of revival not only encourage restoration to the original target of 2012 but preferably an advancement of the target to 2011 to accelerate the revival of the economy.