RPT-India infra fund proposal includes take-out finance

(Repeats story issued late on Friday)

* India infra fund targets 50/50 local, overseas investment

* Banks would fund early stage projects under proposal

* Aims to bring local insurance, pension funds into infra

By Lyndee Prickitt

MUMBAI, June 4 (Reuters) - A plan for an $11 billion Indian fund to channel investment into much-needed infrastructure would aim to make the sector more attractive by allowing local banks to fund projects at higher rates until they start seeing revenue.

Such "take-out" finance, which is relatively new in India, would enable banks to finance the riskier early stages of big-ticket projects before turning them over to the fund, said Deepak Parekh, chairman of Housing Development Finance Corp (HDFC.BO).

Parekh, who heads a committee on the planned fund, submitted a draft proposal to India's Planning Commission on Wednesday, he told Reuters Insider television in an interview.

He also recommended relaxing investment guidelines that curb insurance, pension and provident funds from investing in the infrastructure sector.

"Now the insurance investment regulations need to change to make these long-term debt funds as eligible instruments of investment, under the insurance act, under the pension act, under the provident fund act," he said.

Infrastructure development in India has been plagued by a lack of long-term finance in a country with an underdeveloped corporate bond market. Foreign investors have been reluctant to take on the risk of costly, long-term projects such as power plants and toll roads.

"The most important factor of this fund is that the lending agencies won't take the construction risk, but will participate in these projects after it starts operating, Parekh said." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a link to the TV interview click:

link.reuters.com/cuw28k ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

A government official said this week that India would invest $1.7 trillion in infrastructure projects over the next decade.

"The construction risk will be taken by the banks who fund these projects. So the first few years -- the construction years -- the banks would fund it, then there would be take out funding and the banks will sell these loans to the IDDF," he said.

The IDDF, or Infrastructure Development Debt Fund, would be run by private sector managers and aim to attract 50 percent of its investment domestically and 50 percent from overseas pension, insurance and sovereign wealth funds, Parekh said.

He noted that India's central bank has become concerned over the exposure of banks to infrastructure, which has risen from 3 percent to 10 percent.

"Commercial banks have an asset-liability mismatch. So we are trying to find an avenue where in a short period of time, which is the construction period, the banks can charge higher rates of interest because the risks involved are higher," he said.

"At that stage, the bank can offload it to the fund and then there is more headroom for the commercial banks to lend again for infrastructure," he said. (Editing by Tony Munroe and Unnikrishnan Nair)