To make funds available to the Indian Railways, the Ministry of Finance has approved government sovereign guarantee of Rs 5,000 crore for bonds to be issued by Indian Railway Finance Corporation (IRFC) before the end of this fiscal. These bonds will be subscribed by Life Insurance Corporation of India (LIC).
In addition, the finance ministry has also waived the guarantee fee which otherwise IRFC would have paid, thus decreasing the cost of funds for the transporter. The move will allow the public sector undertaking to raise funds from LIC, which was delayed due to restrictions posed by Insurance Regulatory and Development Authority (IRDA) rules related to exposure limits.
In March, 2015, the railways had entered into a memorandum of understanding (MoU) with LIC under which the country’s largest insurer will have provided financial assistance of Rs 1.5 lakh crore to the transporter between 2015 and 2019. However, despite a requirement to issue bonds worth Rs 30,000 crore per year to achieve the target, the issuance was much below that as LIC and the Insurance Regulatory and Development Authority of India sought government guarantee to safeguard the monies of insurance customers.
In March 2015, railways entered into an agreement with LIC, wherein the latter was to provide financial assistance of Rs1.5 trillion for railway projects from 2015 to 2019. Following the agreement, IRFC raised funds from LIC by selling bonds having a tenure of 30 years and remitting the funds to the ministry of railways for construction of infrastructure projects.
According to Ministry of Railways plans, IRFC was supposed to raise Rs30,000 crore annually from LIC. But due to limit constraints, IRFC had only been able to raise Rs16,500 crore in the past three years, according to a report.
LIC had sought for a sovereign guarantee to increase its purchases. The LIC funds cost the railway ministry 30 basis points above the 10-year benchmark yield. The government guarantee will further ease the flow of borrowed funds for railway ministry to undertake new projects like electrification, high-speed corridors, station redevelopment etc and the funds will be used to undertake such projects. The move comes at a time when the Union Budget for 2018-19 has allocated a record Rs.1.48 trillion for Indian Railways to raise its carrying capacity and improve the train travel experience. These include track doubling, third and fourth line works of 18,000 km; 5,000 km of gauge conversion; redeveloping 600 railway stations, equipping them with Wi-Fi and CCTV cameras; introduction of modern train; and escalators for stations with footfalls of more than 25,000 people a day.
According to reports, IRFC has so far raised Rs 16,500 crore from LIC over the past three years. Funds from LIC will be available to the railway ministry at 30 basis points above the 10-year benchmark yield. The current financial year has just two more working days left and the issuance of bond is likely within this period. “The ministry of railways will send the guarantee (documents) to LIC and IRFC will also send the request to take up bonds. Though IRFC expects it to happen within this month, it all depends on LIC,” said a government official. IRFC borrows on behalf of the railways to fund projects and rolling stock. While revised estimate for IR’s extra budgetary resources through IRFC is Rs 24,786 crore for 2017-18, it has been budgeted at Rs 28,500 crore for 2018-19.