In a significant move, the Ministry of Finance has approved a proposal to provide government guarantee of ₹ 5,000 crore in the current financial year for Indian Railway Finance Corporation (IRFC) bonds to be subscribed by Life Insurance Corporation (LIC).
The guarantee fee for the amount has also been waived by Ministry, said a release.
The decision will ease the flow of borrowed funds for Ministry of Railways to undertake projects.
The Ministry of Railways, it may be recalled, had entered into Memorandum of Understanding (MoU) with LIC on March 11, 2015 by which LIC has to provide a financial assistance of ₹ 1,50,000 crore for identified Railway projects from 2015 to 2019.
In terms of the MoU, IRFC has been raising funds from LIC by issue of bonds having a tenor of 30 years and remitting the funds to Ministry of Railways for construction of Railway projects.
However due to exposure limit constraints as per IRDA (Insurance Regulatory and Development Authority) guidelines, LIC has not been able to subscribe to IRFC bonds beyond a certain limit.
In order to overcome the exposure limit constraint, the Ministry of Finance has approved Government guarantee so that LIC can subscribe to Government-guaranteed bonds without any limit as per IRDA guidelines. The LIC funds are available to Ministry of Railways at 30 basis points above the 10-year benchmark yield.