By : Vijay Sawal
INTRODUCTION :
Initially established in 2021[1] in an attempt to address India’s infrastructure financing gap, the National Bank for Financing Infrastructure and Development (“NaBFID”)was meant to operate as an infrastructure lender with a broad mandate so as to grant more finance, all the while boosting the market. With its recent designation as a Public Financial Institution (“PFI”) by the Ministry of Corporate Affairs[2] (“MCA”)in consultation with the Reserve Bank of India (“RBI”), NaBFID gains a legal standing that it earlier lacked, likely to improve its capacity to finance large-scale infrastructure projects, thereby bolstering the country’s infrastructure development.
Legal Status and Strategic Importance of NABFID’S DESIGNATION
Section 2 (72) of the Companies Act, 2013[3] (“CA Act, 2013”) defines a PFI by listing various entities and outlining conditions under which other institutions can attain this status. The said section list the entities such as the Life Insurance Corporation of India (“LIC”), established under provision of Life Insurance Corporation Act, 1956[4], the Infrastructure Development Finance Company Limited (“IDFC”), recognised initially under clause (vi) of sub-section (1) of Section 4A of the Companies Act, 1956[5], and certain specified companies under the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002[6].
It is pertinent to note that above provision[7] allows the Central Government (“CG”) in consultation with the Reserve Bank of India (“RBI”), to notify additional institutions as PFI(s), subject to fulfilment of following conditions: First, an entity must be established or constituted by any Central or State Act, excluding the CA, 2013 or previous company laws, Second and last ,it must have at least 51% of its paid-up share capital under the control of the CG, any State Government(s) (“SG”), or both, establishing.
The designation of a NaBFID as a PFI under CA Act, 2013[8] provides it with significant advantages that elevate its financial and operational capacities in critical areas of infrastructure financing, credit facilitation, and legal recourse. One of the benefits is the tax treatment of income derived from certain types of bad or doubtful debts, as specified under provision of the Income Tax Act[9], 1961 (“IT Act”), with the same providing for a provision whereby income by way of interest on bad or doubtful debts is chargeable to tax only in the year it is credited to the profit and loss account of the institution, or when it is actually received, upon whichever occurs earlier.
Another advantage for PFIs is granted under the provisions Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2000[10] (“SARFAESI”) specifically including PFI(s) within the scope of institutions that can take advantage of the said Act’s provisions for the swift enforcement of security interests, ridding the need for lengthy court proceedings by directly seizing and selling collateral assets.
PFI (s) further enjoy an enhanced reputation and credibility among investors due to their legal recognition, often backed by substantial government ownership or control[11], helping attract both domestic and foreign investments, due to the perception that PFIs have a lower credit risk profile due to implied or direct governmental support, consequently further bolstering their roles as facilitators of national economic policy.
Given the NaBFID’s key role in mobilising funds for projects within the National Infrastructure Pipeline[12], its PFI status is expected to further add to its capability in financing and facilitating public-private partnerships (PPPs) in particularly critical sectors like renewable energy, urban development, and transportation[13]. Moreover, the designation also consequently introduces additional oversight by the CG, ensuring that NaBFID’s operations remain aligned with government-preferred economic policies.
.UNDERSTANDING FUTURE IMPLICATIONS
Financially, NaBFID’s general objectives include but are not limited to direct and indirect lending for infrastructure projects, attracting private capital, and providing refinancing options to currently existing infrastructure loans[14]. This envisioned role in the market could prove to be of particular significance to the current reliance on government funding for large-scale infrastructure projections.
[1] NaBFID Act, Financial Services, https://financialservices.gov.in/beta/en/NaBFID-act.
[2] https://www.mca.gov.in/bin/dms/getdocument?mds=jRtIoIzlULI6f7QIxfVsqw%253D%253D&type=open
[3] Companies Act, 2013, No. 18 of 2013, S.2 (72).
[4] Life Insurance Corporation Act, 1956, No. 31 of 1956, S.3.
[5] Companies Act, 1956, No. 35 of 1956, S. 4A (1)(vi).
[6] Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, Act No. 58 of 2002.
[7] Companies Act, 2013, No. 18 of 2013, S.2 (72) (v).
[8] Companies Act, 2013, No. 18 of 2013, S.2 (72).
[9] Income Tax Act, 1961, No. 43 of 1961, S. 43D.
[10] Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, No. 54 of 2002, S.2 (m) (i).
[11] Companies Act, 2013, No. 18 of 2013, S.2 (72).
[12] Union Finance Minister Smt. Nirmala Sitharaman reviews performance of National Bank for Financing Infrastructure and Development (NaBFID), Press Information Bureau, https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2010388.
[13] Is NaBFID a Failed Institution?, Deccan Herald, https://www.deccanherald.com/opinion/is-nabfid-a-failed-institution-3031876.
[14] Purpose, NaBFID, https://www.nabfid.org/purpose.
