Srei Infrastructure Finance [Get Quote] is set to be the first Indian company to go for Islamic financing for over Rs 200 crore (Rs 2 billion) loan. The Kolkata-based company has received the permission from the Reserve Bank of India [Get Quote] for the proposed fund collection.

Confirming the development, Sunil Kanoria, director, Srei Infrastructure Finance, said the company would finalise the details of the instrument in a week. The instrument is expected to have a five-and-a-half-year tenure.

HSBC is the banker for the fund collection.

Islamic financing does not permit the lender to charge interest against loan. Shariah forbids any fixed return on capital, so charging or receiving interest is ruled out. The financing or loan is provided on a risk-sharing basis, which is in compliance with the Islamic laws. The returns on Shariah-compliant lending involve a share of profits earned by a borrower.

Islamic financing is not allowed in some sectors such as wine, tobacco and pornography.

Kanoria was reluctant to share the details of the instrument, but said that the the cost of financing would be lower than any similar instrument in India. Industry sources said it might be similar to a quasi-equity bond.

Kanoria said the fund would be deployed in the equipment financing business. Srei has already announced infusion of Rs 25 crore (Rs 250 million) in the equipment financing business, which is being spun off into a separate entity, towards its equity contribution. BNP Paribas, France's largest bank, would pick up 50 per cent stake in the equipment financing arm for Rs 775 crore (Rs 7.75 billion).

Sources said if Srei would have raised the funds to onlend, it would not have been Shariah-compliant.

Infrastructure equipment finance market stands at around Rs 14,000 crore (Rs 140 billion). It is estimated to grow at a compounded annual rate of 40 per cent to over Rs 31,000 crore (Rs 310 billion) in three years as the country needs to improve its inadequate roads, ports and electricity generation.