SGF - Sovereign Green Fund - a New Sourcce of Finance under erstwhile Demand Number 16 ( Capital Expenditure)

 

SGF - Sovereign Green Fund  

• SGF stands for Sovereign Green Fund 

 

• SGB stands for Sovereign Green Bonds

• New Source of Finance - Introduced in FY 2023-24  

 

• SGF comes under Major Head 8235 (General & Other Reserve Funds). Nirbhaya Fund also comes under MH 8235.

 

• Plan Heads to be financed by SGF - PH 2100 - Rolling Stock and PH 8100 - MTP - Metropolitan Transport Projects.  

 

• The first two numerals of SGF in the Classification of Capital Expenditure are 35 (maybe 35 taken from the Major Head 8235) 

 

• The source of SGF is SGB - Sovereign Green Bonds   

SGB - Sovereign Green Bonds:  

• Launched recently in India in the year 2022 

 

• To raise money for Green Infrastructure. 

 

• To meet India’s goal - Net-Zero Carbon emissions by 2070  

 

• Definition of Green Bond (by World Bank): A Debt security that is issued to raise money for initiatives that are relevant to the environment or the climate.  

• The First ever Green Bond - issued by the World Bank in 2008 

 

• Sectors - Green Buildings, Sustainable Transportation (Metro Rail), Renewable Energy, etc.  

 

• NDC stands for Nationally Determined Contribution  (A nationally determined contribution is a non-binding national plan highlighting climate change mitigation, including climate-related targets for greenhouse gas emission reductions)

 

• GFWC - Green Finance Working Committee  - to look after the issuing of SGB 

 

• Investors (of SGB) may offer Tax incentives or Tax exemptions.   

Key points for MCQ

1. SGF stands for Sovereign Green Fund 

 

2. SGB stands for Sovereign Green Bonds 

 

3. SGF used for Plan Heads - 2100 (Rolling Stock) and 8100 (MTP - Metropolitan Transport Projects) 

 

4. Major Head for SGF - 8235 - General & Other Reserve Funds 

 

5. The first two numerals of SGF in Capital Classification are 35 

 

6. The Source of SGF is SGB  

 

7. Net Zero Carbon Emission - India’s Goal to Achieve by 2070 

 

8.  The First-ever issue of Green Bond - 2008 by World Bank 

 

9. NCD stands for Nationally Determined Contribution 

 

10. GFWC stands for Green Finance Working Committee    

 

11. EBR stands for Extra Budgetary Sources

The First two numerals of different sources of Finance in Capital Classification are  

The First two numerals	Source of Finance
20	Capital
21	DRF - Depreciation Reserve Fund
23	Development Fund - I
33	Development Fund - II
43	Development Fund - III
53	Development Fund - IV
25	Capital Fund
26	RSF - Railway Safety Fund
27	SRSF - Special Railway Safety Fund
28	Capital - Nirbhaya Fund
29	RRSK - Rashtriya Rail Sanrakshak Kosh
30	Capital (Covid)
35	SGF - Sovereign Green Fund
82	EBR - PPP (Public Private Partnership
83	EBR - IF (Infrastructure Finance)
84	EBR - IRFC (Bonds)
85	EBR - Special

Notes

: 

• It is high time to streamline or restructure all the above Sources of Finance.  Because Many Funds are not funded sufficiently by the Government because of poor internal surplus owing to the non-rising of fares in Indian Railways. (in last 12 years) 

• The objectives of the above Funds are overlapping one other.  

• It is learned, that the Indian Railways already formed a committee to look into the above issue. 

******

IRFC - Indian Railway Finance Corporation and EBR (IF)

 IRFC - Indian Railway Finance Corporation and EBR (IF)

By M Nageswara Rao

Salient Features

• IRFC Website: http://irfc.nic.in/  

• Chairman & MD : Shri Amitabh Banerjee, IRAS (2020 year)

• Hqrs: New Delhi

• Dedicated borrowing arm of Indian Railways

• IRFC's share capital has been wholly provided by the Govt. of India.  Under the new companies Act, 2013, IRFC is a "Government Company" (being more than 51 % of share capital contributed by Govt.)

• Recently divested its stake to the Public in the open market.

• One and only Non-Banking Financial Company (NBFC) dedicated to the development of Railways

• Assets as on date: Rs. 1,30, 000 Crores

• IRFC is managed by a lean team - Total strength - 25 only -  a rare mix of Civil servants, CAs, MBAs, ICWAs, CFAs, and Engineers. The Overhead to Turnover Ratio is 0.15 %, which is perhaps the lowest for any company the world over. 

• Established in the year 1986 as a Public Limited Company under the Companies Act, 1956/2013.

• A Schedule ‘A’ CPSE - Central Public Sector Enterprise - under administrative control of the Ministry of Railways. 

• Charges a margin of 0.5% over the average borrowing rate in a year

•  The one and only major client is Indian Railways.

 

Background:

• The Budgetary support from the Ministry of Finance is dwindling and insufficient internal resources to meet the rising needs of Traffic. To cope up the increasing traffic needs, Indian Railways has no other option, but to depend on mobilizing resources from Public.

 

• No Ministry , (except Ministry of Finance) has the right to mobilize the funds  by issue of bonds to the Public.  So Indian Railways has floated a company under the Companies Act i.e., IRFC for raising resources from Public through issue of Bonds.

Vision:  To be a premier Financial Services Company for the development of the Rail Transport sector.

Mission: To make IRFC one of the leading Financial Service Companies in the country, for raising funds from the Capital market at competitive cost for augmenting Railway plan finances

Objectives: 

1. To mobilise market borrowings at the most competitive rates as per annual targets fixed by the Ministry of Railways.

2. To provide timely funding for acquisition of Rolling Stock assets for use by MOR.

3. To explore the possibility of financing CPSEs and other entities such as RVNL, RLDA, RCIL, PRCL etc for creation of rail infrastructure.

Business of IRFC is :-

 

• To mobilize resources through market borrowings from Domestic as well as Overseas Capital Markets at most competitive rates.

• Funding for acquisition of Rolling Stock Assets and leased to Railways.

• IRFC also gives loans to RVNL-Rail Vikas Nigam Ltd, RLDA,Railtel Corporation of India ltd, PRCL etc towards viable and bankable projects being executed by them.

IRFC - Lease terms: -

 

• IRFC leases the assets from the month of acquisition to IR based on a standard leasing agreement. Cost of borrowing to Railways is around 8.4%.  (Whereas Cost to IRFC is 7.9 % with a margin of 0.50 %)

• Indian Railways pays lease rentals to the IRFC every half year.

• After 30 years, Rolling stock assets may be sold to the Indian Railways for a nominal price.

 

IRFC's Leasing Charges - Accounting policy

 

• Before 2005 year, entire Leasing charges (both Principal & Interest) paid to IRFC had been charged to Revenue i.e., Demand No.09 - Abstract G - Operating Expenses - Traffic.

 

• However, In the year 2005, Indian Railways changed its accounting policy for the Lease charges paid to IRFC.

 

• From 2005 year onwards , Leasing charges paid to IRFC have bifurcated as follows.

Principal component	New Plan Head -2200 - Leased Assets ( Demand No.16)
Interest component	Demand No.09 - Abstract G - Operating Expenses - Traffic   (OWE - Ordinary Working Expenses)

 

• This has resulted in the reduction of OWE - Ordinary Working Expenses of

Indian Railways and improved the Operating Ratio.

 

 

 

Role of IRFC in Indian Railways infrastructure:

 

• Part of EBR - Extra Budgetary Resources requirement of IR.

• Share of IRFC in Capex of IR is nearly 25 %

• Cumulative funding to Rail Sector - Rs. 2.20 lakh crore as of 31.03.2018

• Nearly 9000 Locos, 50000 coaches, 2.5 lakh wagons - constitute nearly 75 % of the Total Rolling stock fleet of Indian Railways. 

• Three fourth of   ( 75 % ) of Rolling stock assets operating on the Indian Railways network is funded by IRFC.

• Target for IRFC - Rs.30,000 Crores  (out of Rs.1,60,000 Crores) -2020-21 Capex

 

EBR (IF) – Extra Budgetary Resources (Institutional Financing)

 

• New source of finance for funding CAPEX-Capital Expenditure in Indian Railways in addition to the existing sources of finance.

 

• Existing/traditional sources of  finance in Indian Railways are 1) Loan Capital 2) Depreciation Reserve Fund 3) Development Fund 4) Railway Safety Fund 5) Capital Fund 6) EBR – Extra Budgetary Resources like IRFC, RVNL, PPP.

 

Context/backdrop of initiating EBR (IF):

 

• Railways expansion (Works Budget) has suffered very much due to shortage of resources either by insufficient support from the Ministry of Finance (General Revenues) in the form of Loan Capital or unable to generate internal resources due to not increasing passenger fares to match cost recovery.

 

• Large shelf of projects could not be completed due to insufficient funds.

 

• Result is “time overruns” and “cost overruns”.  Also non realization of revenue/income for the period of delay.

 

• To overcome the shortage of funds for the works programme, the Railway Ministry decided to borrow funds from INSTITUTIONS, so as to ensure the completion of crucial railway projects for generation of revenue.

 

FACTS ABOUT EBR(IF)

 

• Utilised for only priority works such as New Lines, Gauge Conversion, Doubling, Traffic Facilities, Railway Electrification, S&T etc.  - Object is to enhance throughput on the congested corridors.

 

• One more condition for employing these funds are " Should be utilised in such a manner either completion of projects in the same year or first quarter of the following year".

 

• As of now, LIC funding is the main source of EBR(IF).  In this regard an MOU between IR and LIC was  signed on 11.3.2015.  LIC has agreed to fund 1.5 lakh crores over next five years.  This is just the beginning of a new era of funding Railway CAPEX.

 

• In future, several institutions including foreign pension funds may fund the Railway projects through this mechanism.

• IRFC will raise funds from LIC against BONDS periodically based on IRs requirements.

• Deposit -IF account is maintained by PAO/RB/Northern Railway (similar to the IRFC Deposit a/c for rolling stock funding).

 

• PAO/RB will transfer the funds to the Zonal Railways on a requirement basis.

 

• EBR-IF funds drawn for a project will be NON-LAPSABLE and any amount unspent for unavoidable reasons shall be carried forward as Opening Balance for Next year.

 

• EBR-IF funded projects would be treated like 'DEPOSIT WORKS" for accounting of fund flows.  However  no departmental charges i.e., 12.5 % shall be applicable for works funded from EBR(IF).  (Because departmental charges are levied for Deposit works, but the works which are proposed were purely Railway ones)

 

• Repayment of Loan through Lease charges by IR to IRFC is as follows. Period of payment is 30 years.

 

1-5 years	6-10years	11-30 years
Interest component	Interest component	Capital component
Though Interest, but it is capitalised and charged to Demand NO.16 (PH 2200)	Charged to Demand No.09-790	Charged to Demand No.16(PH 2200)

 

• Mechanism of LIC funding Railway projects is an interesting one. IRFC issued BONDS to the LIC.

• The funds which recd through BONDS , will be provided to the Indian Railways for completion of crucial projects by IRFC.

 

• IR develops/constructs the projects (behalf of IRFC) by entering "DEVELOPMENT AGENCY AGREEMENT" with IRFC.

 

• The required land for development or construction of such projects is licensed to the IRFC by IR duly entering "LICENSING AGREEMENT".

 

• IRFC will own the project on pro rata basis (to the extent of funding by IRFC)

 

• Such owned assets will be leased to the IR by IRFC duly entering the "LEASE AGREEMENT"

 

• Based on the Lease Agreement, IR will pay the Lease charges to the IRFC during the lease period.  Usually Lease charges contain i) Capital component chargeable to New Allocation 2231(projects) & 2232(Rolling stock) under Minor Head 2200 i.e., Plan Head 2200 under Demand No.16 and ii) Interest component chargeable to Demand No.09 - Operating Expenses - Traffic ( 09-791 (Projects) & 09-792 (Rolling stock)

 

• IRFC will use these lease charges for redemption of bonds (issued to LIC) and arrange payments to the LIC.

 

• Thus the account has come to an end.

 

Example:

 

• Construction of New line of 100 Kms between Stations A and B.  LIC funds (through IRFC) were utilised to the extent of 25 Kms (out of 100 Kms). 

 

• IRFC will own the project assets i.e., 25 Kms (on pro rata basis) and the lease the same 25 Kms to the Indian Railways on LEASE basis.

 

 

COMPARISON OF IRFC FUNDING ROLLING STOCK AND PRESENT FUNDING BY LIC

• More or less, EBR (IF) is similar to funding of Rolling stock so far by IRFC by issuing bonds to the public/institutions since 1986.

 

• In both cases, IRFC is leasing assets to the IR and in lieu of Lease charges.

 

• However the good sign is coming forward of Institutions such as LIC for helping CAPEX of Railways.

 

• But Railway has to bear the interest rate around 8 to 10 % in case of EBR(IF) instead of traditional funding by Loan Capital at the rate of 4 % dividend ( effectively it was 2.5 % only considering the subsidies/reliefs)

 

 

 

 

 Public listing of IRFC

 

• The initial public offer (IPO) of the IRFC - January 18-20, 2021, at a price band of Rs 25-26 per share

• Subscribed nearly 3.5 times.

• It received bids for 432 crore shares against the issue size of 124.75 crore shares. 

• Ahead of the IPO, IRFC had raised about Rs 1,400 crore from anchor investors.

• The issue constituted up to 13.64% of the post issue paid-up equity share capital of the company.

• Became the first NBFC from the PSU sector that went public today.

• The IPO of the fifth railway's company to hit the stock market since 2017- comprised an issue size of Rs 4,600 crore, out of which the fresh issue comprises Rs 3,100 crore and OFS Rs 1,500 crore. IRFC share allotment was finalised on January 25.

•  Government's stakeholding reduced to 86% from 100% post the IPO. 

• The company will utilise the net proceeds from the Rs 4,634-crore IPO towards augmenting the company's equity capital base to meet future capital requirements arising out of growth in business and general corporate purposes. 

• It is currently traded around Rs. 25 /- per share face value Rs. 10 /- (on 12th March, 2021)

*****