The Securities and Exchange Board of India (Sebi)-appointed committee on dedicated infrastructure funds (DIF) by mutual funds (MFs) has recommended that DIFs should operate as close ended schemes with a maturity of seven years and a possibility of one or two extensions, subject to adequate disclosures in the offer documents and approval of trustees. The committee has also recommended that DIFs should be given a listing option to provide liquidity to retail investors.

The committee, headed by UTI Mutual Fund chairman UK Sinha, has recommended some tax incentives to retail investors for investment in DIFs. “Considering the long-term and closed ended nature of the proposed DIFs, the Committee believes that it will be extremely important to provide some tax incentives to retail investors to motivate them to invest in DIFs and, therefore, help in and benefit from infrastructure creation in the country,” it said. The Committee, which submitted its report to Sebi today, also believes that without the tax incentives no retail investor would be motivated to invest in a DIF. It has, however, added that such tax benefits should be available only to the original investors. Presenting the report, the panel observed that the proposed DIFs will need to be structured differently from the current mutual fund schemes, as these will largely invest in unlisted companies, with longer gestation periods.

“Venture capital funds have the ability to invest in such unlisted and longer tenure projects, but have minimum contribution requirements, thus leaving out retail investors. DIFs can be structured to fill this gap and can be uniquely positioned to benefit both the ongoing infrastructure initiatives as well as potential retail investors,” the Committee said. In terms of investments, it has suggested that DIFs should be allowed to invest up to 100 per cent of their funds in unlisted securities, including both equity and debt instruments. Exposure to listed companies, however, should be limited to 10 per cent of the NAV at the time of making the investment. Further, DIFs may be allowed to take control of the asset, if they so desire, and own up to 100 per cent of the paid up capital of a company. The Committee has suggested several safeguards to protect the interests of investors.

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