The Lok Sabha has passed the National Bank for Financing Infrastructure and Development Bill, 2021 on 23 March, 2021. The said Bill provides for the establishment by the Central Government of the National Bank for Financing Infrastructure and Development (“NaBFID”), a development financial institution, with the goal of supporting the development of long term, non-recourse infrastructure financing in India and the development of the bonds and derivatives markets necessary for such financing.

It is expected that the risks involved in infrastructure financing due to higher credit costs, high risk of delay and failure of projects will be addressed by NaBFID in coordination with the Central and State Governments, regulators, financial institutions, institutional investors and other relevant stakeholders, in India or outside India. Overall, the NaBFID will provide a supporting, technology enabled ecosystem across the life-cycle of infrastructure projects as a provider, enabler and catalyst for infrastructure financing in India. Over the medium to long term, such support to the bond market is likely to foster complementarity of market raised debt with direct lending by the NaBFID.

Our Role: We drafted the NaBFID Bill and advised the Department of Financial Services, Government of India on it.

SAM & Co Team: Anurag Dwivedi, Partner, Pratik Datta, Senior Research Fellow, Gautam Mudgal, Senior Associate and Adya Jha, Associate.

Overall Guidance: Shardul Shroff, Executive Chairman

The salient features of the Bill are as follows:

1. Establishment of NaBFID and other development financial institutions : A development financial institution (“DFI”) called the National Bank for Financing Infrastructure and Development (“NaBFID”) will be established as a body corporate headquartered in Mumbai. At the onset NaBFID will be wholly owned by the Central Government, however, its shareholding may be reduced over a period of time, such that the Central Government holds a minimum of 26 per cent at all times. NaBFID can form subsidiaries or joint ventures or branches, in India or outside and allow multilateral institutions, sovereign wealth funds, pension funds, insurers, financial institutions, banks, etc. to become stakeholders.

   While the NaBFID is the principal DFI, any person can set up a DFI on making an application to the RBI for a licence, which may be granted in consultation with the Central Government subject to terms and conditions specified by it through regulations.

   Objectives of NaBFID: The objectives of NaBFID are twofold, developmental and financial. On the development front, it will coordinate with the Central and State Governments, regulators, financial institutions, institutional investors and other relevant stakeholders, whether in India or outside, to facilitate building and improvement of relevant institutions to support the development of long-term non-recourse infrastructure financing in India, including the domestic bonds and derivatives markets.

   On the financial front, NaBFID will lend or invest, directly or indirectly,take over or refinance existing loans; transfer loans and advances granted by it; subscribe to or purchase, underwrite, acquire, hold or sell stocks, shares, bonds, debenture stocks, debt securities; borrow or raise money. Overall, it is expected to attract investments from the private sector and institutional investors in infrastructure projects located in India or partly in India.

   Management of NaBFID : The management, direction and general superintendence of NaBFID will be undertaken by a Board of Directors (the “Board”), acting on business principles and in consonance with the provisions of the Bill. The Bill provides for the composition, terms of office and service conditions of the Chairperson and other members of the Board as well.

2. Prohibition of certain business activities and related party transactions : The NaBFID is prohibited from conducting certain businesses including loan or advance on the security of its own bonds or debentures to any person or body of persons, of which any of its directors is a proprietor, partner, director, employee or guarantor, or in which one or more directors hold substantial interest. It is also prohibited from entering into any contract or arrangement with a related party with respect to the following transactions, except with the consent of the Board and subject to conditions as may be prescribed:

• • sale, purchase or supply of any goods or materials;
  • selling or otherwise disposing of, or buying property of any kind;
  • leasing of property of any kind;
  • availing or rendering of any services;
  • appointment of any agent for purchase or sale of goods, materials, services or property;
  • such related party’s appointment to any office or place of profit in NaBFID , its subsidiaries or joint ventures or associate companies;
  • underwriting the subscription of any securities, or derivatives thereof, of NaBFID.

3. Performance review: The Bill mandates a performance review of NaBFID every five years by an external agency on certain key performance indicators.

4. Government grants and contributions; support; reimbursement of hedging costs : The Central Government is empowered to provide support to NaBFID, if and when necessary, through grants or contribution in the form of cash or marketable Government securities. By the end of the first financial year from its establishment, the Government shall grant or contribute an amount of Rs. Five Thousand crores in cash or marketable Government securities.

   The Government shall prescribe a concessional rate of fees upto 0.1 per cent., at which Government guarantee may be extended to NaBFID for borrowings from multilateral institutions, sovereign wealth funds and such other foreign institutions as may be provided by rules made by the Central Government. The Government will also reimburse, partly or fully, any hedging costs incurred in connection with any borrowing of foreign currency by NaBFID for the purposes of granting loans and advances or its repayment, so as to insulate NaBFID from any fluctuations in rates of exchange.

5. Receivables from NaBFID to be held in trust : Any sums received from NaBFID by a financial institution for refinancing shall, to the extent of the accommodation granted by NaBFID and remaining outstanding, be deemed to have been received by it in trust for NaBFID and shall be paid by such financial institution to NaBFID. All securities held or which may be held by such financial institution on account of any transaction in respect of which an accommodation has been granted, shall also be held by such financial institution in trust for the NaBFID.

6. Establishment of Reserve Fund : NaBFID shall establish a Reserve Fund to which such sums as the Board may deem fit out of the annual profits accruing to NaBFID may be transferred, provided that such sums shall not be less than twenty per cent. of the annual profits accruing to NaBFID.

7. Rules and Regulations : The Central Government is empowered to make rules and the RBI to make regulations with the prior approval of the Government, to give effect to the provisions of the Bill, once enacted. These rules and regulations shall be laid before each House of the Parliament.

8. Protection of action taken in good faith and indemnification: The Bill offers protection to NaBFID and its Chairperson, Directors, employees and officers for actions taken in good faith. It also indemnifies every director against all losses and expenses incurred by him in, or in relation to, the discharge of his duties, except those caused by his own wilful act or default.

   The Bill also prohibits any investigation agency, including the Police, Central Bureau of Investigation, Serious Fraud Investigation Office, Directorate of Enforcement and other agencies from conducting any inquiry/investigation into any alleged offence committed in relation to any recommendation made or decision taken by the Chairperson or other directors, employees or officers of NaBFID in discharge of his official functions or duties, without the previous approval of the competent authority specified therein.

To refer to the National Bank for Financing Infrastructure and Development Bill, 2021 as passed by Lok Sabha, click here.