MUMBAI, JUNE 7: A group of experts have recommended major changes in the funding pattern of infrastructure projects.

The group, consisting of six leading industrialists and finance experts and formed by the Bombay Chamber of Commerce and Industry, has recommended that the present guidelines on funding need to be relaxed. The current rules permit a single domestic financial institution (FI) to lend only 25 % of its net worth to a single project and also 15 % of the loan portfolio to one industry. ``Also no project will be able to redeem its borrowings within seven years,'' said a white paper prepared by the core group led by S D Kulkarni, CEO & managing director, Larsen & Toubro Ltd.

The other members of the group are: K M Gherda, chairman, Tata Services, V S Palekar, chairman, Johnson & Johnson, R K Pitamber, managing director, Mahindra & Mahindra, D M Satwalekar, managing director, HDFC and G P Pande, general manager, Grindlays Bank.

As far as foreign funding is concerned, although a large amount of global money and skills are available for funding infrastructure needs, what is required is clear and transparent ground rules, it said.

Since credit from developmental agencies and multilateral instituitions, come with conditions and stiff non-utilisation penalties, multilateral aid can fill only a small part of the financing needs of the infrastructure sector. ``Therefore India needs to develop other innovative methods and instruments of financing,'' the paper said.

``Projects requiring large equity financing could be funded through private placements with institutional investors. These investors could at a later stage offload their shares to the public at a higher price, as the project nears completion,'' it said.

It said the infrastructure sector also needed a strong underpinning of equity in the initial phase from wholesale investors. Specialty funds with sector specific focus are an attractive focus.

The Indian insurance sector should be opened up in line with the Malhotra Committee recommendations. This will help the development of a long-term debt market which is a prerequisite for the successful implementation of any long-term funding.

The LIC has investible funds of Rs 65,000 crore, most of which is directed into government and quasi-government debt. A small legislative change that frees the funds from directed govt lending would open up enormous funds for infrastructure. ``India can, like many countries of the world, use benevolent trusts, religious trusts and charitable trusts to buy long-term debt with attractive cover for risks taken,'' the paper said.

The bulk of resources for overall investment for infrastructure would have to come from domestic savings. ``This will only take off with the development of the wholesale debt market, which provides long-term money, matches the long term-fund needs of the infrastructure sector,'' it said.

In order to achieve this, an active secondary debt market has to be laid. First and foremost, the Reserve Bank of India, must encourage the emergence of an active money and govt debt market which would underpin this.

The repos market in sovereign and quasi-sovereign debt instruments should be encouraged. A number of players in the debt market would lead to the establishment of a universally accepted yield curve. The team feels that time is ripe for giving a spurt to the development of a secondary debt market.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.