Monday, May 23, 2011

Government may allow education bodies to float bonds

The Ministry of Human Resource Development (MHRD) is considering allowing educational institutions to float bond issues for fund generation. “At present, we are working on some of these ideas. We are also thinking of a National Education Finance Corporation, which can tap into a lot of such resources. We will try to put it all together and work it out as a strategy in the new scheme in the 12th Five-year Plan,” a senior MHRD official told Business Standard.

A widely-accepted concept in the West, a bond issue allows institutions to tap into the vast pool of not only their alumni network, but also people who wish to do their bit for the education sector. There will, however, be certain conditions education institutions will have to adhere to, which the MHRD is still working on.

Universities in the US and the UK, including Harvard, Stanford, Cambridge and Princeton, meet their financial needs and finance important projects cheaply via bond issues. These universities need ratings from a credit agency while going for the bond issue.

However, to allow Indian universities to raise money via bonds, some important changes will be required. Educational institutions in India can be set up only by trusts, societies or companies. For a long time, the Centre has been experimenting with ideas to plug the funding gap in higher education. Experts say the move may require modifications in the Companies Act, especially those relating to the formation of companies under Section 25, as well as state laws relating to the way charitable trusts are allowed to function. Internationally, donation of land and shares are accepted by universities to help create an endowment.

Sector experts say getting a rating from credit rating companies will compel educational institutions to be more careful about their investment plans, as well as cash flows. The latter will require educational institutions to increase their fees or trim their offerings as and when required, in order to remain financially attractive and get a good rating. A good rating, in turn, allows educational institutions to avail of loans at a cheaper rate.

Rating agencies, including CRISIL and CARE, have already begun rating B-schools in India. Going ahead, CARE may also rate engineering colleges in the country. The move may allow educational institutions to offer their assets, including their corpus, as collateral for meeting important investment outlays.

“Universities need money and this will be a good way for them to raise funds when the price of credit has risen sharply and is no longer readily available,” said Narayanan Ramaswamy, Executive Director, Educational Services, KPMG. However, before any institution went for a bond issue, it needed to put in place a mechanism where it could be equipped to handle such bond issues, he added. “This brings fiscal responsibility for the management. So, the university needs to be well equipped to manage it. Many universities don’t even have a treasury department or finance officers to manage funds,” he added.

Many institutes, including the Indian Institutes of Management (IIMs), are looking at generating endowment funds through these methods. While Indian institutes do not invest money in the financial markets, international universities park their money – locally and internationally – with public and private equity, stocks, real estate, commodities and bonds, among others. In India, international university endowment funds are registered as Foreign Institutional Investors (FIIs). According to data from the Securities and Exchange Board of India, till last year the number of such funds investing in the Indian market went up over three-fold to around 20 in 2010, against six in 2008.

President and fellows of Harvard College, for instance, have doubled the target investment in emerging markets to 10 per cent for 2010, against five per cent in 2005. Harvard, the richest US school, has a $27.6-billion endowment, followed by Yale University’s $16.7 billion. Other registered endowment funds are the Duke Endowment; Cornell University; Emory University; The John Hopkins University; The Ohio State University and Massachusetts Institute of Technology Basic Retirement Plan.

Anand Sudarshan of Manipal University told Business Standard that while it will be a good idea for Indian institutions, the statutes of universities or educational institutions may have to undergo change to be allowed to generate funds via the debt market.

Source: Business Standard, May 23, 2011

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