Finance Ministry Looks To Ease Investment In Infra Projects By Insurers (07-Sep-2010)
In a move that will increase the availability of capital for the infrastructure sector, the government has proposed to lower the minimum credit rating that is currently required for insurance companies to be able to invest in infrastructure projects.
The finance ministry has approached the insurance regulator IRDA to allow higher investment in infrastructure projects by permitting greater investment in ‘AA’ rated bonds. The issue was raised earlier to but could not proceed due to some disagreements within the finance ministry officials.
As per the current settings, insurance companies are allowed to invest in ‘AAA’ or ‘AA’ rated debt papers by the infrastructure companies. Further, out of total investment, three quarters have to be in the triple-A rated instruments only. This however reduces the amount of investment that debt issued by infra companies can attract from insurers. Therefore, the finance ministry wants to increase the proportion of total investment that can go into lower rated instruments.
According to estimates prepared by the Planning Commission, the Indian economy needs around $1 trillion of investment in infrastructure space in five years beginning FY12. The Commission also foresees a gap of whopping 35% in funding. The finance has been looking to bridge this gap and has taken a number of other steps as well like giving additional income tax exemption on Rs 20,000 worth investment in infra bonds.
The insurance regulator however apprehends that by increasing the share of lower rated debt in the total investment, it might be increasing the risk for small time investors and putting in danger their lifelong savings. The IRDA officials are likely to meet the finance ministry again on the matter soon. While the insurance regulator may agree to hike the share of ‘AA’ rated bonds, the increase is likely to lot less than what the finance ministry is asking at 25-35%.
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