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India plans $500bn infrastructure push

Financial newsThe Indian Government is close to launching an investment vehicle in London to use $5bn of the country's foreign exchange reserves as a contribution towards a $492bn investment plan over the next 5 years for India's roads, railways and airports.

The special purpose vehicle, which will be a subsidiary of the Government-owned India Infrastructure Finance Company, has gained UK regulatory approval and is expected to open for business next month, according to S. S. Kohli, chairman and managing director of IIFC.

The company wants to hire advisers and has set a deadline of Friday for expressions of interest. Kohli used to work for the Punjab National Bank and said the subsidiary may take temporary offices in the City of London.

N. K. Madan, who will be managing director of the subsidiary, said: "The subsidiary is likely to be incorporated in about a month's time. Initial operations of the entity may start with a staff of between three and four officials."

The Indian Government estimates an investment of about $492bn will be needed by the end of 2012 to upgrade the country's roads, ports and airports. In its annual policy statement for 2008, the Reserve Bank of India warned that "infrastructure bottlenecks are emerging as the single most important constraint on the Indian economy".

Kohli said the London-based subsidiary will function by borrowing funds from the Reserve Bank, custodian of the country's $272bn worth of foreign currency reserves, in the form of long-term securities.

The fund will then provide foreign currency funds to Indian companies engaged in the infrastructure sector and has set aside an initial investment of $5bn from the reserves to fund domestic projects.

The initiative will run in addition to the $5bn infrastructure fund the IIFC started raising in India last year with investments from the Blackstone Group and Citigroup. Kohli said: "We have held negotiations with a number of other banks, including Deutsche Bank, regarding investments and have secured $2bn from Australia's Macquarie Bank this month."

As a result of the Goverment's investment plans, more foreign and domestic private investors are raising similar funds. Private equity group 3I raised $1bn last year. GE plans to create an infrastructure fund of between $300m and $500m, while ICICI Bank announced plans for a $2bn fund last September.

Investment banks are attracted to India's booming economy, which is expected to grow at 8% a year until 2020, according to projections by Jim O'Neil, head of global economic research at Goldman Sachs. He said India's equity market has risen 499% since Goldman categorised it as one of the BRIC economies in 2001.

Its growth has led to a surplus in foreign exchange reserves, but unlike its fellow BRIC countries Russia and China, India has no dedicated sovereign wealth fund.

Source: Financial Times Online
Date: 22.01.2008 [161]

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