Rule 288: Setting up an Infrastructure Debt Fund for the Schedule VII exemption
Rule 288 lays down the procedure and conditions for an Infrastructure Debt Fund that seeks exemption under Schedule VII [Table: Sl. No. 46] to the Act. The fund must be a Non-Banking Financial Company within the Reserve Bank of India framework, invest only in specified infrastructure projects, raise money only in the ways listed in the rule's Table, respect a 20% concentration limit and a bar on projects where its specified shareholder has a substantial interest, and file its return on time. If any condition is not met, the Act applies as if it were not an Infrastructure Debt Fund.
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Rule 288 - Procedure for setting up an Infrastructure Debt Fund for purpose of exemption under Schedule VII [Table: Sl. No. 46] to Act
(1) Every Infrastructure Debt Fund under this rule shall be set up as a Non-Banking Financial Company conforming to and satisfying the conditions laid down in the regulatory framework provided by the Reserve Bank of India.
(2) The funds of the Infrastructure Debt Fund shall be invested only in —
(a) post commencement operation date infrastructure projects, which have completed at least one year of satisfactory commercial operations; or
(b) toll-operate-transfer projects as the direct lender.
(3) The Infrastructure Debt Fund shall raise the funds in the manner specified in column B of the following Table subject to the conditions mentioned in column C thereof:
Table Sl. No. (A) Manner of raising funds (B) Conditions (C) 1. Issue rupee denominated bonds or foreign currency bonds. (a) Such bonds must be in accordance with the directions of Reserve Bank of India and the relevant regulations under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 made under the Foreign Exchange Management Act, 1999 (42 of 1999); and (b) in case of an investor in the said bond being a non-resident, the original or initial maturity of bond, at time of first investment by such non-resident investor, shall not be less than a period of five years. 2. Issue zero coupon bonds. (a) Such bonds shall be in accordance with rule 7; and (b) as mentioned in clause (b) column C of Sl. No. 1. 3. Raise funds through loan route under external commercial borrowings. (a) Such external commercial borrowings shall be in accordance with the directions of the Foreign Exchange Department of the Reserve Bank of India; and (b) the tenor shall not be less than a period of five years and such borrowings shall not be sourced from foreign branches of Indian banks. (4) The investment made by the Infrastructure Debt Fund in an individual project or project belonging to a group at any time, shall not exceed 20% of the corpus of the fund.
(5) No investment shall be made by the Infrastructure Debt Fund in any project where its specified shareholder or the associated enterprise or the group of such specified shareholder has a substantial interest.
(6) The Infrastructure Debt Fund shall file its return of income as required by section 263(1)(a) on or before the due date specified in section 263(1)(c).
(7) In case the Infrastructure Debt Fund does not fulfil any of the conditions provided in this rule or directions of the Reserve Bank of India, all provisions of the Act shall apply as if it is not an Infrastructure Debt Fund referred to in Schedule VII [Table: Sl. No. 46] to the Act.
(8) In this rule, —
(a) "associated enterprise" shall have the meaning assigned to it in section 162;
(b) "concern" shall have the meaning assigned to it in section 2(40);
(c) "corpus" means the total funds of the Infrastructure Debt Fund raised for the purpose of investment;
(d) "group" means a group as defined in section 2(mm) of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(e) a person shall be deemed to have substantial interest in —
(i) a company, if he is the beneficial owner (including beneficial ownership held by one or more of his relatives, in case the person is an individual) of shares (not being the shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than 10% of the voting power; or
(ii) a concern other than a company if he is, at any time during the tax year, beneficially entitled to not less than 20% of the income of such concern;
(f) "relative", in relation to an individual, means—
(i) spouse of the individual; or
(ii) brother or sister of the individual; or
(iii) brother or sister of the spouse of the individual; or
(iv) brother or sister of either of the parents of the individual; or
(v) any lineal ascendant or descendant of the individual; or
(vi) any lineal ascendant or descendant of the spouse of the individual; or
(vii) spouse of the persons referred to in sub-clauses (ii) to (vi); or
(viii) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual; and
(g) "specified shareholder" means a non-banking financial company, or a bank, or any other person holding, directly or indirectly, shares carrying not less than 30% of the voting power in Infrastructure Debt Fund.
Rule breakdown
Structure and investments: Rule 288(1) and (2)
The fund must be set up as a Non-Banking Financial Company meeting the RBI regulatory framework.
It may invest only in post commencement operation date infrastructure projects that have completed at least one year of satisfactory commercial operations, or in toll-operate-transfer projects as the direct lender.
Raising funds: Rule 288(3)
Rupee denominated or foreign currency bonds, in line with RBI directions and the relevant FEMA regulations; non-resident investors need an original or initial maturity of at least five years at first investment.
Zero coupon bonds, in line with Rule 7 and the same five-year condition for non-residents.
External commercial borrowings, in line with the directions of the RBI Foreign Exchange Department, with a tenor of at least five years and not sourced from foreign branches of Indian banks.
Limits and filing: Rule 288(4) to (7)
Investment in an individual project or projects of a group cannot exceed 20% of the corpus at any time.
No investment in a project where the specified shareholder, its associated enterprise or its group has a substantial interest.
The return of income under section 263(1)(a) must be filed by the due date in section 263(1)(c).
Failure to meet any condition of the rule or RBI directions means the Act applies as if the fund were not an Infrastructure Debt Fund under Schedule VII [Table: Sl. No. 46].
Definitions: Rule 288(8)
Corpus is the total funds raised for investment.
Substantial interest means at least 10% of voting power in a company, or at least 20% of the income of another concern.
Specified shareholder means an NBFC, bank or other person holding, directly or indirectly, at least 30% of the voting power in the fund.
Key takeaways
NBFC form
The fund must be an NBFC following the RBI framework.
Five-year money
Non-resident bond money and ECBs must have at least a five-year term.
20% cap
No single project or group above 20% of corpus.
Loss of status
Any breach means the Act applies as if it were not an Infrastructure Debt Fund.
Practical checklist
- Check the corpus percentage before each new project investment.
- Confirm the original maturity is at least five years before accepting a non-resident bond investor.
- File the return of income by the section 263(1)(c) due date.
Avoid
- Do not invest in projects where the specified shareholder or its group has a substantial interest.
- Do not raise funds in a way not listed in the Table in Rule 288(3).
FAQs
Which projects can an Infrastructure Debt Fund invest in?
Post commencement operation date infrastructure projects with at least one year of satisfactory commercial operations, or toll-operate-transfer projects as the direct lender (Rule 288(2)).
What is the concentration limit?
Investment in an individual project or projects of a group cannot exceed 20% of the corpus at any time (Rule 288(4)).
Can the fund borrow from a foreign branch of an Indian bank?
No. External commercial borrowings must not be sourced from foreign branches of Indian banks (Table, Sl. No. 3).
Who is a specified shareholder?
An NBFC, a bank or any other person holding, directly or indirectly, shares carrying at least 30% of the voting power in the fund (Rule 288(8)(g)).
Glossary
- Corpus
- The total funds of the Infrastructure Debt Fund raised for investment (Rule 288(8)(c)).
- Substantial interest
- At least 10% of voting power in a company, or at least 20% of the income of another concern, as set out in Rule 288(8)(e).
- Specified shareholder
- A person holding, directly or indirectly, shares carrying at least 30% of the voting power in the fund (Rule 288(8)(g)).