Government is looking at creating a fund under India’s first sovereign wealth fund, NIIF, which will address capital requirements of domestic steel companies.
- National Investment and Infrastructure Fund (NIIF) is a fund created by the Government of India for enhancing infrastructure financing in the country.
- NIIF, proposed to be set up as a Trust, would raise debt to invest in the equity of infrastructure finance companies such as Indian Rail Finance Corporation (IRFC) and National Housing Bank (NHB). The idea is that these infrastructure finance companies can then leverage this extra equity, manifold. In that sense, NIIF is a banker of the banker of the banker.
- Its creation was announced in the Union Budget 2015-16
- The objective of NIIF would be to maximize economic impact mainly through infrastructure development in commercially viable projects, both greenfield and brownfield, including stalled projects. It could also consider other nationally important projects, for example, in manufacturing, if commercially viable.
This is different from the National Investment Fund
- The cabinet Committee on Economic Affairs (CCEA) on 27th January, 2005 had approved the constitution of a National Investment Fund (NIF). The Purpose of the fund was to receive disinvestment proceeds of central public sector enterprises and to invest the same to generate earnings without depleting the corpus. The earnings of the Fund were to be used for selected Central social welfare Schemes. This fund was kept outside the consolidated fund of India.
Green field and Brown Field Investment?
- Green-field and brown-field investments are two different types of foreign direct investment, or FDI. Green-field investments occur when a parent company begins a new venture by constructing new facilities in a country outside of where the company is headquartered. Brown-field investments occur when a company or government purchases an existing facility to begin new production.
- There are several reasons why a company opts to build its own new facility rather than purchase or lease an existing one. The primary reason is that a new facility offers the maximum design flexibility and efficiency to meet the project’s needs. An existing facility forces the company to adjust based on the present design.
- Additionally, all capital equipment needs to be maintained. New facilities are typically much less costly to maintain than used facilities. If the company wants to advertise its new operation or attract employees, new facilities also tend to be more favorable.
- The clear advantage of a brown-field investment strategy is that the building is already constructed. The costs of starting up may be greatly reduced. The time devoted to construction can be avoided as well.
- Government is also working on operationalising National Infrastructure Fund, the sovereign fund, and that is envisaged as a mother fund and within that there will be specific sectoral funds.
- The Finance Ministry had signed an MoU with Abu Dhabi and Russian nano-technology company and is also having discussions with some funds with the UK for investments in NIIF.
- While the government will invest Rs.20,000 crore in NIIF, the remaining amount will come from private investors.
- If the existing national or municipal government requires licenses or approvals, the brown-field facility may already be “up to code.” In cases where the facility previously supported a similar production process, brown-field investments can be a real coup for the right company.
- Brown-field investments run the risk of leading to buyer’s remorse. It is rare that a company looking to engage in FDI finds a facility with the type of capital equipment and technology to suit its purposes completely. If the property is leased, there may be limitations on what kinds of improvements can be made.
Reasons that affect the competitiveness of Indian steel industries
High capital cost is one of the major reasons
Government is working on a two pronged strategy to deal with that
- i) Government is looking at developing long-term funding for sectors like steel.
- ii) RBI has brought our the 5/25 format, where there is a recognition that it cannot be expected from industries like steel to repay their loans in short spans of 5-7 years.
- The 5:25 scheme allows banks to extend loans for a longer period of time for infrastructure projects, typically 20-25 years, in a bid to match cash flow of these projects. It can refinance them every 5 or 7 years.
The stressed assets are a major challenge. Lenders today are unable to get capital at lower costs as their credit ratings are impacted due to the stressed assets and it is being recognised that some of this stress is not coming because of mismanagement, a lot of stress is due to global factors that are beyond the control of individual firms.
The RBI, Department of Financial Services and the banks are working to see how government can help clean up the balance sheets so that banks can get capital at lower costs.