The Union Cabinet on March 16 approved a Bill to set up a Development Finance Institution (DFI) to raise long-term capital to fund infrastructure development, as the government has envisaged an investment of Rs 111 lakh crore by 2025.

The proposed legislation will give effect to the Budget announcement made by Finance Minister Nirmala Sitharaman on February 1. The government has proposed Rs 20,000 crore to capitalise the institution.

The Bill provides for an institution and institutional arrangement that will help in raising long-term finance. The Budget provides for the initial amount. 

During the pre-liberalised era, India had DFIs which were primarily engaged in the development of industry in the country. ICICI and IDBI, in their previous avatars, were DFIs. Even the country’s oldest financial institution IFCI Ltd acted as a DFI.

In India, the first DFI was operationalised in 1948 with the setting up of the Industrial Finance Corporation (IFCI). Subsequently, the Industrial Credit and Investment Corporation of India (ICICI) was set up with the backing of the World Bank in 1955.

The Industrial Development Bank of India (IDBI) came into existence in 1964 to promote long-term financing for infrastructure projects and industry. 

Sitharaman said she expects the proposed institution to raise up to Rs 3 lakh crore in the next few years because it will have access to the market funds, which are otherwise not available.

The DFI will also get tax benefits for 10 years.

The DFI will be managed by a professional board, comprising at least 50 per cent non-official directors. Persons of eminence are also envisaged to be on the board. 

The minister recalled that in the past also attempts were made to set up DFI, and referring to IDBI, she said those institutions changed the nature of their businesses for different reasons.

In her Budget 2019-20 speech, Sitharaman had proposed a study for setting up DFIs for promoting infrastructure funding. About 7,000 projects have been identified under the National Infrastructure Pipeline (NIP) with a projected investment of Rs 111 lakh crore during 2020-25.

NIP, a first-of-its-kind initiative to provide world-class infrastructure across the country and improve the quality of life for all citizens, will be crucial for attaining the target of becoming a $5 trillion economy by FY 2025.

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