New Tax Law A Dampener for ‘Corp ‘tol dosh (CBO, Ftc Ratings ada ‘Deepeningof the corporate bondmarketis Asset classes and typesof issuers, ‘These are corporate bonds, municipal bonds and ass es. However, when it comes to Seourltzstion aiscussions ae confit to closed doors with only a few affected ‘arties raising issues albeit in shrill vole- s-Thechangein taxlaw introdacedby the fSoverniment of India (Gol) carior this ear withrespecttotaxing noomedistlb- ‘uted by securitisation trusts has serious ‘Bffective June 1, 2013, the Income-tax ‘Act 1961 was amended (Section 115TA) ‘so that Indian securitisation trusts are required to pay additional tax on in- come distributed folnvestors. The Fangefrom0% (if theinvestorisexempt from tax)t025% (if the investor isan in- dividual or Hindu Undivided Family (HUF) t030% (orall other eat Investors), The tax is on distribution, Which s comparable to dividends. And, Prior to the amendments, tax on in- come distributed ‘by securitisation trusts was charged and paid atthe i vestorlevelan, nmany cases, investor classes enjoyed a tax-exempt status. BY gnoringthiskey actor thenew dispen- pleted sation seeks to tax distributions across the board, thus potentially dilating ‘transaction economies and viability. Securitisation transactions originated by banks, non-banking finance compa- {Hes(ABS) and mortgage-backed secur ties (MBS) are affected by the applica: ton of this new" stipulation of distribution tax However, tho phontial disincentive ‘can pose to infrastructure developers In ‘the long run is considerable. As more ‘and more projects become operational and establish decent performance track ‘Fecords, sponsors would contemplate sein capital masts fore inancing ‘thelr bank debt through the lasue TCs via ankruptey-remote vehicles or securitisation trusts ‘nthelarger context ofthe government's stated objective of galvanising bond mar- ‘kets to part-finance the ambitions 81 tril tion investment in building India’s intras- tice over the next five years, the aforesaid tax law, acts as a dammpener 9 ‘companies seeking, innovative instru. ‘ments towiden thelr financial toolbox. ‘One needs to consider the infrastruc: {ure financing model in developed mar- ‘ets as well Banks lend to projettsat the Slaton saan uadet ake the poe Ject completion risk. Once the projects arecompleted, thoexposurelssoldincap- ital markets through various Instru- ‘ents includingsecuritisation. ‘Banks need to reduce their infrastruc: {ntothehandsof the investor Assuming that by and large the investor need not Teceutriybotancer 0 W hhuge disincentive. The inp Besides, fash low mismatch issues, Listed below fareafew llustrativestructares in then frastructure sector where this legisls tive amendment could pose a deterrent to the furtherance of capital market 1s- ‘suanees via the PTCroute toamsal-pownby nk ‘Banks’ ability tosell thet Ee nao ont as. ture projects) to ine RD iasiaske tebe fends Gms) fosuine PTC aqversely affect Tatoceer et Olen esp ca fulelstnat” straints, lending capacity Pooled Se Sameer ee ee ere a level.The | the bank loan market to Wratrumentis’ the fixed income market soot Be a fear ‘ihe nent er Mela = eres Sec ‘nue streams such as an airport devel- erae an areeeart fee (UDF) although in most instances Sena cea within the airport company itself and So rieer arate aes Leuity Tait ponds Power utilities sekingtoraisecapital(to orate Bo 16, rumen Aenean tao tot ‘2capex programmelby securitisingeash ffow streams established under legisla- that credit tiveorrepulatory authority. A very wide- ly used capital market product in the US, utlity tariff bands.as they are generally referred to are secired by collateral in ‘theformof adedica'ed special tariff Largepower conglomerates power conglomerates planning to seeuritise exh flows from an identified ower asset (sa, one amongst a portfolio ‘of many generatingplants) by leveraging nits possible unique features operat nelle, roads, ‘usstands and ofterpublicamenties "Theldeaof secur singcash lows from pool of ssits ean be extended to the ‘non of privatelybull, financed” and Thalntained ivrastructureas el Mexicolha succestully demonstrated rain ‘market appetite for pooled toll oad project finaning, The naval, projet SPV and projet concessions nd Market continue as before, but the debt Is ref ‘anced using a master trust structure ‘the senor debt by pooling multiple project revenues. The financing consists of the bundling of ‘debt from several separate tll road pro- jects into one financing trust. Credit en- hancement sachievedbyeross-collater- alisation through the pooling of project ‘evenues and portfolio diversification, Having elaboratedon the negative im- plications of the change in tax regime forinfrastructurefinance,itisalsonec- essary to stipulate a couple of caveats In order to balance the criticism. One, | the new law is applicable only for in come disiributions by securitisation ‘rusts and not to other vehicles that tay be employed for raising debt such as operating companies or companies ‘thatare special purpose vehicles. How. lever, these sltomate vehicles may not boas tax-efficiont as trusts are Two, 8 reversal of this tax law will, no doubt, have loss of revenue Implications for the exchequer. That sald, the benefits from facilitating flow of iong-term in- vestment from fixed-income markets into financing infrastructure would more than offset the revenue os ‘Atthisjuncture,Indisneeds toeguipit ‘self with options that would allow is- ‘suors in the infrastructure sector fo use ‘the medium of eapital markets to fund the everexpanding need for finance, ‘Theaforesald taxamendmentservesthe ‘opposite purpose besides hurting the overalldevelopmentof the band market. |viewsare persona