On 16th March 2021, Union Finance Minister, Nirmala Sitharaman, announced that the Union Cabinet has cleared the proposal of setting up of the “Development Finance Institution with the capital infusion of Rs 20000 crore. This proposal was approved in a bid to boost the infrastructure development in India.

Union Cabinet of Indian chaired by Prime Minister Narendra Modi.

Backdrop

The announcement for this legislation was made by the Union finance minister during the Union Budget 2021-22 speech on 1st February 2021. After this announcement, some 7,000 projects have been identified under National Infrastructure Pipeline. The government of India has projected the investment of Rupees 111 lakh crore for the period 2020-25.

About Development Finance Institution

It will be set up in order to raise long-term funds. There will also be some tax benefits on Development Finance Institution for a period of ten years. Development Finance Institution would comprise of a professional board in which 50% of the members will be non-official directors. Under it, the initial grant will be Rupees 5,000 crores. Later, additional increments of grant will be made in to effect within the limit of Rupees 5,000 crore. In the initial phase, new institution will be owned by government while in the later phase, the government’s stake will be cut to 26%.

Significance of Development Finance Institution

The government of India is also planning to issue securities to Development Finance Institution which in turn will help in lowering the cost of funds. This will help the institution to leverage the initial capital and drawing funds from several sources. It will also positively impact the bond market in India. The Development Finance Institution also seeks to raise the funds from global pension and insurance sectors in order to invest in new projects. Development Finance Institution would also help the banks to cater the issue of asset-liability mismatch in the bank which are lending to infrastructure.

Union Cabinet clears DFI with capital infusion of Rs 20000 crore Union Cabinet clears DFI with capital infusion of Rs 20000 crore