India announces changes to boost infra investment

Life insurers will be allowed to invest in SPVs of private firms and in more debt instruments rated lower than AAA.

India's Finance Minister P. Chidambaram on Monday announced planned changes for the life insurance sector which could help more funds flow into the country’s infrastructure projects.

At present, there is an investment cap of 25 per cent in the debt instruments of one company in the infrastructure sector, and 20 per cent in case of equity. Furthermore, debt investments must be for more than 10 years and have a minimum rating of AA; and investments are permitted only in infrastructure special purpose vehicles (SPVs) floated by a public sector company that meets the rating criteria.

In order to encourage investment in infrastructure, the government is considering allowing life insurers to invest in infrastructure SPVs floated by any company where the SPV is a wholly-owned subsidiary of the parent company. The debt instrument issued by the SPV must be guaranteed by the parent company.

Another proposed change, to include government securities within the 75 per cent of AAA-rated debt instruments that life insurance companies must hold, will create “a space of about 12.5 per cent for investments in less than AAA rated debt instruments”, Chidambaram said.

In 2011, the total premium underwitten by life insurers was INR2.9 trillion (€43 billion; $55 billion). Of this, only 20 per cent currently goes towards the infrastructure sector.

For a discernible shift among institutional investors towards infrastructure projects, “there needs to be clarity on legal regimes, contract validation and enforcement, timely commencement of sanctioned projects and an environment where the PPP model becomes more effective, and appropriate risk mitigation structures” according to Robin Roy, associate director at Pricewaterhouse Coopers.

These reforms were part of a wider plan to revive the life insurance sector, which has slowed down. Policy issuances have fallen eight per cent in 2011 to 2012.

The Indian government has taken other recent measures to channel investment into the infrastructure sector, as the country aims to invest $1 trillion in infrastructure over the 2012 to 2017 period.

In March 2011, the limit on foreign institutional investment in long-term corporate bonds issued by infrastructure companies was raised from $5 billion to $25 billion.

The state-owned India Infrastructure Finance Company (IIFCL) has launched a credit enhancement scheme to boost the credit rating of an infrastructure project from BBB- or A to AA, allowing institutional investors to buy the bonds.

As part of this initiative, IIFCL and the Asian Development Bank announced a guarantee scheme last month to partially guarantee INR7.2 billion of rupee-denominated infrastructure project bonds.