National Investment and Infrastructure Fund (NIIF) was established by the Government of India and is the first sovereign wealth fund of India. The traditional banks did not adequately meet the infrastructure sector’s need for long-term finances because they were pressurized by the non-performing assets (NPAs) and stressed assets (SAs) coming up to approximately 4.5% NPAs and 11% SAs since 2016. Due to this impending need for long-term finances, NIIF was founded in 2015 under the Union Budget (2015-16) with the primary objective inter alia to garner long-term finances for the infrastructure sector from domestic and international investors. The NIIF obtained registration under the Indian market regulator, the Securities and Exchange Board of India (SEBI), in December 2015 under Category II Alternative Investment Fund. Thus, firstly, this Blog Post discusses the need and rubrics of the NIIF. Secondly, the authors explore the governance structure and the challenges faced by the Fund. Thirdly and lastly, the authors analyze whether the Fund is a driver of infrastructural growth in India.
A. Need for National Investment and Infrastructure Fund (NIIF)
India’s banking sector, especially the public-sector Banks and publicly owned vehicles, was generally tasked with supporting the infrastructure sector in terms of its long-term financing needs. Further, there was a genuine need for money to finance the growing infrastructure sector in India as significant and continuous capital infusions were needed across both the old and new projects and the expansive areas such as roads, railways, ports, airports, energy, and other sectors.
These projects need long-term patient money given the infrastructure sector’s long-gestation periods. Thus, NIIF can play a significant role in serving this purpose. The Government of India will invest Rs. 20,000 crores into the NIIF, with another Rs. 20,000 crores expected from private investors. This essentially relieved the banks from committing to long-term financing portfolios and projects with long gestation periods.
B. Rubrics of NIIF
The funds of NIIFare mandated to be invested in commercially viable projects, including stalled and greenfield and brownfield projects. It also includes nationally commercially viable projects such as those in the manufacturing sector. Further,NIIF’s sector coverage includes — waste management, transportation, energy, water, and other infrastructure sectors of India. Thus, this means that the objective of NIIF is to maximize infrastructure development through generating long-term returns that are risk-adjusted for the investors in a sustainable manner.
NIIF has been categoricallyseparated into three funds as follows:
a. Master Fund: This fund invests in the operating assets of core infrastructure sectors such as energy, ports, and other related core sectors. This means that it will directly invest in sector-specific platform companies or projects within India. In other words, it targets those businesses that have a long-term track record and operate in regulated environments or under long-term/concession agreements. Further, it includes businesses that provide predictable stable and inflation-hedged cash flows.
b. Fund of Funds: This fund invests in those funds that are managed by third-party fund managers in infrastructure and associated sectors. In other words, this fund will invest in India-focused portfolio funds across sectoral and product strategies. It includes investment in Green Growth Equity Fund, Affordable Housing Fund, and other related funds.
c. Strategic Opportunities Fund: This fund invests in large-scale projects/companies and greenfield projects that are commercially viable and likely to benefit from the country’s growth trajectory in the medium to long term.
The three funds mentioned above collectively comprise NIIF and are called NIIF Funds.
ii. Composition and Structure
NIIF was set up as a trust with aninitial corpus proposed for Rs. 20,000 crores, wherein the Government of India had 100% ownership/stake in it. However, NIIF’s ownership has now reduced to 49%. The remaining percentage of equity/ownership, i.e., approximately the remaining Rs. 20,000 crores are raised from marquees foreign and domestic investors such as Abu Dhabi Investment Authority, Temasek, and HDFC Group.
NIIF is considered India’s quasi-sovereign wealth fund with the Center’s significant stake. Its three funds — Master Fund, Fund of Funds, and Strategic Opportunities Fund —were set up as Category II Alternative Investment Fund (AIF) under the SEBI (Alternative Investment Funds) Regulations, 2012 (hereinafter “SEBI AIF Regulations, 2012”). Category II AIF essentially includes debt and private equity funds. It does not get any concessions and cannot raise debt for investment purposes. As NIIF is set up as a Category II AIF, it is eligible for a “pass through” status under the Income Tax Act, 1961. In other words,a “pass-through” status means that the income generated by the fund would be taxed directly in the hands of the final investor, wherein the fund in and of itself will not be mandated to pay any tax on the income generated.
After receiving investment money from the Government and Anchor Partners, the NIIFprovides equity/quasi-equity support to commercially viable projects such as greenfield, brownfield, and stalled projects. Further, theNIIF invests in funds mainly engaged in infrastructure sectors and managed by Asset Management Companies (AMCs) for “equity/quasi-equity funding of listing/unlisted companies.” In other words, NIIF invests in the corpus created by Asset Management Companies (AMCs) for investing in private equity. Lastly, theNIIF also provides equity to Financial Institutions (FIs)/Non-Banking Financial Companies (NBFCs), mainly engaged in infrastructure financing. This, in turn, allows these FIs and NBFCs to leverage the equity/quasi-equity support from NIIF and provide debt to the projects selected by the FIs and NBFCs.
iii. Sources of Finance
a. Government’s funds to each entity established as an AIF under the NIIF. NIIF shall also receive funds from Domestic Pension and Provident Funds and National Small Savings Fund.
b. Equity participation from “strategic anchor partners” like sovereign, quasi-sovereign, bilateral, and multilateral investors.
Further,NIIF can also utilize proceeds of assets of Public Sector Undertakings and monetized land for infrastructural development. Thus, in recent times, NIIF’s various funds have shown significant investment amounts. The NIIF Master Fundparticipated in the first NHAI Toll-Operate-Transfer (TOT) bid for nine toll roads in partnership with a Public Sector Pension (PSP) owned global roads platform. Additionally, the NIIF Fund of Fundsinvested in HDFC’s Affordable Housing Fund, wherein the Fund would provide mezzanine finance to developers of affordable and mid-income urban housing projects. The investmentwas worth $ 95 million. In finality, the NIIF Strategic Investments Fundacquired IDFC’s Infrastructure Debt Fund, wherein the Fund is responsible for lending to operating infrastructure projects and enabling the original project financiers to recycle their capital after the commencement of operations.
2. Governance Structure of NIIF
NIIF’s activities aregoverned by a Governing Council headed by the Finance Minister of India. The Governing Council has representatives from the Government of India and includes well-renowned professionals and economists in the infrastructure finance sphere. It could also include representatives from other non-governmental shareholders. Apart from governing, the Council also provides “strategic” mentorship and guidance to the NIIF’s management, i.e., the investment team and fund managers. The Government of India shall decide the term and period of appointment of the Governing Council. Currently,it only meets annually and does not interact daily with the NIIF.
Apart from governance, NIIF shall be supported by one or more CEOs (depending upon the number of funds created) and an investment team that shall consist of expert staff who shall have expertise in project evaluation, financial structuring, economic master planning, and other related areas. In this context, NIIF ismanaged and supported by NIIF Limited. In other words, NIIF Limited is a company incorporated under the Companies Act, 2013, and is the investment manager to the AIFs — as defined under the SEBI AIF Regulations, 2012 — set up under NIIF. NIIF Limited is responsible for the daily operations of the funds andcomprises a team of over 40 professionals based out of Delhi and Mumbai. The team has domestic and international expertise in infrastructure operating and investing.
A. Assistance in Project Preparation and Implementation
NIIF frequently collaborates with the Indian Government and provides inputs at a policy level regarding developing the Indian infrastructure pipeline. Further, itplays a crucial role in various technical stages, i.e., from project preparation to project implementation of innovative techniques and concepts in core infrastructure sectors. However, it is imperative to note thatNIIF neither has any formal right over an infrastructure project chosen by the Indian Government nor formal obligations for investing in policy-driven projects.
B. Monitoring of Performance by NIIF Investment Committee
NIIF’s funds aresupervised by an “investment committee” comprising NIIF’s CEO and NIIFL executives. This supervision is in terms of managing the companies under NIIF’s investment platform and management of NIIF’s investment portfolio. Further, subsidiary structures are established to ensure NIIF’s performance is monitored, suchas establishing a monitoring committee in Hindustan Infralog Private Limited tasked with holding regular board meetings alongside other performance monitoring tasks. It is quintessential to note that this committee does not have any representatives from the Government or Investors. This is done to ensure that the decision-making process is objective and adheres to the standards of the global fund management industry.
C. Environmental and Social (E&S) Management Policy of NIIFL
The purpose of theE&S Management Policy is to ensure that NIIFL’s every investment complies with state and Central Governments’ E&S requirements and objectives. These requirements and objectives are evident from the infrastructure sector’s prevailing institutional guidelines, regulations, and policies. Further, NIIFL aims to adhere to the appropriate international industry standards and practices (wherein the E&S risks are substantially higher) while ensuring minimum compliance with the state and Central Governments’ E&S requirements and objectives.
E&S objectives of NIIFL can be summarized as follows:
i. Sustainable management of projects on E&S requirements and objectives through a risk-management and regulatory compliance approach.
ii. Promotion of “good” social and environmental practices in designing and developing projects.
iii. Mandating compliance with state and Central Governments’ regulatory standards and requirements on E&S as a bare minimum requirement for every project.
iv. Ensuring that projects are protected, and their value is enhanced by recognizing their activities with the principle of As Low as Reasonably Practicable (ALARP) throughout their life cycle. ALARP principle essentially aims to ensure that a project’s “residual risk” is reduced to the most reasonably practical extent.
v. Periodic review and updating of NIIFL’s E&S Management framework.
vi. Evaluating the material E&S impacts and risks of every funding proposal (for a project) wherein these impacts and risks are covered in all phases of the project life cycle. Further, the projects’ ability to be managed according to the ALARP principle must also be evaluated.
vii. Formulate and incorporate E&S risk mitigation strategies through appropriate mechanisms and tools at every project phase.
viii. Development of a legally binding commitment through measurable objectives and allowing existence for transparency through a “reporting mechanism” in NIIFL’s direct and indirect investments.
ix. Provision of sustainable and committed support for the development, institution, operation, and periodic monitoring and review of the Fund Level Environmental and Social Management Systems (FL-ESMS). This is for those sub-funds that are managed under the Fund of Funds.
3. Challenges faced by NIIFs in India
NIIF in India faces a plethora of challenges. Firstly, NIIFis capable of catalyzing the inflow of long-term foreign funds. This is because one of NIIF’s objectives is investments in commercially viable projects. This means that when NIIF invests in various projects and infrastructure finance companies, these projects and infrastructure finance companies will now be able to inject more resources in the infrastructure sector by increased “leveraging” through long-term foreign funds such as global pension funds and sovereign wealth funds. This is problematic because it only magnifies the existing debt in the infrastructure sector.
Secondly, it will be a conundrum for NIIF to distinguish and separate commercially viable and unviable projects.According to an economic survey, it was found that the stalled projects’ value was approximately Rs. 8.8 lakh crores, i.e., 7% of the GDP. This means that several projects may not be open and responsive to resurrection and must be avoided. Further, NIIF may gain investor trust and confidence provided it “judiciously” chooses the appropriate projects with acceptable risk-adjusted returns for NIIF’s investors.
Thirdly, the Indian infrastructure sector suffers from attracting international investors’ trust and confidence. This becomes increasingly important in the context of NIIFwhen it was found that these global investors are likely to adopt a cautious approach in investing in the Indian infrastructure sector. The reason behind the same was due to India’s investment outlook. In other words,it was found that India scores below the regional average in BMI Research’s operational and project risk index. Further,India had low scores for crime, security risk, and construction risk. Additionally,it was highlighted that one-third of projects in India — worth approximately $ 210 billion — are generally delayed.
Fourthly and lastly, although NIIF claims to be independent of governmental influence during choosing and deciding on investment projects,there is a lucid lack of accountability and transparency. This is becausethere is a dearth/absence of NIIF’s project plans and annual reports being made public. This becomes increasingly problematicin the absence of adequate governance safeguards as the investments and projects become vulnerable to vested interests such as corporate battles.
4. Conclusion: Is NIIF the Answer?
InNovember 2020, at the Virtual Global Investor Roundtable, India was pitched as a lucrative destination for Foreign Direct Investment (FDI). The resilience of Atma Nirbhar Bharat (self-reliant India)was also highlighted as part of the Indian Government’s strategy for economic recovery. Although India isone of the fastest-growing countries and ambitiouslyaims to invest $1.5 trillion under the National Infrastructure Pipeline, it suffers from a conundrum ofsevere infrastructure deficit, especially amid the COVID-19 pandemic. This, in turn, holds back the economic growth of India. However, NIIF is likely to resolve the same conundrums as it can mobilize capital for economic growth and resolve key developmental challenges in India.
There are various reasons for NIIF being an integral solution to India’s infrastructure sector. Firstly, NIIF’s mandate is investments in private equity fundsmanaged by third-Party fund managers with proven track records across various economic and market cycles. Secondly, NIIF’sfirst investment was in January 2018, wherein it created an “investment platform” for logistics businesses, transportation, ports, and terminals in India. This platform would invest in opportunities in the port sector, river ports and transportation, “freight corridors,” logistics infrastructure such as cold storage, and port-led SEZs such as inland container terminals. Thirdly,it has been found that NIIF made an equity investment of Rs. 4,689 crores, wherein the co-investment by NIIF’s partners was approximately Rs. 7,053 crores by the end of September 2020. This means that co-investment allows NIIF to deploy increased capital at lucrative returns while striving to preserve the multiplier effect. Further, NIIF is likely to invest with co-investors so that the co-investors’ share in portfolio entities is either equal or more than NIIF’s share. On the other hand, NIIF is not likely to invest with entities that have conflicting interests in the project. Fourthly, when it comes to state-level projects, NIIF is likely to invest only when third-Party, non-governmental professional investors are involved to prevent governmental influence. Fifthly and lastly,an India-UK Green Growth Equity Fund (GGEF) is also being established under the Fund of Funds of NIIF. This shall have investments of GBP 120 million each from the Indian Government (through the NIIF) and the Government of the UK and shall be pivotal in sustainable investments. Therefore, NIIF’s project investments carry promise to reduce the deficit of the Indian infrastructure sector and boost its economic growth and development through domestic and international support and sustainable investments.
The views and opinions expressed by the authors are personal.
About the Authors
Ms. Kamiya Marwah is an Associate at Shardul Amarchand Mangaldas, New Delhi.
Pushpit Singh is a 3rd-year student at Symbiosis Law School, Hyderabad, and is an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Gaurang Mandavkar
Associate Editor: Pushpit Singh
Junior Editor: CH Sriniwas
Preferred Method of Citation
Kamiya Marwah and Pushpit Singh, “National Investment and Infrastructure Fund in India: A Comprehensive Critique” (IJPIEL, 11 February 2022)