Saturday, November 13, 2010

Save and build the nation Source: BUSINESS LINE (08-NOV-10)

Bombarded with calls from investment agents asking you to consider investments in infrastructure bonds to avail `additional` tax benefits? Institutions such as IFCI, IDFC and L&T Infrastructure Finance had hit the market with such bonds in recent times.

So, wondering what`s The India Infrastructure story, though fascinating, has continued to elude the government; lack of sufficient funds being one of the key constraints. For the 12th Plan (2012-2017), to fund projects in sectors such as roads, ports and power, the government had projected a need of about USD 1 trillion, part of which was to be funded by channeling household savings.

The product

To achieve the latter, the finance ministry, through the annual budget, had opened up the window for even private players to issue infrastructure bonds. As the funds have to be utilized towards infrastructure lending, the finance ministry has been selective about entities that can issue long-term infrastructure bonds.

These bonds can only be issued by IFCI, LIC, IDFC and non-banking finance companies that have been awarded infrastructure status by the Reserve Bank of India. Power Finance Corporation and Power Trading Corporation are some of the companies that have been recently provided infrastructure status by the RBI.

All infrastructure bond offers have to adhere to the broad conditions specified by the government for such issues. For one, the bond shall be issued during the 2010-11 fiscal. There is at present no enabling provision to extend it beyond this period. Two, there are restrictions on the amount of funds that companies can raise through the issues.

Such sum cannot exceed 25% of the disbursements/investments made by the companies in 2009-10. Three, the tenure of the bond would have to be a minimum of 10 years with a lock-in of at least five years (given the long-term nature of projects). Post the lock-in period, investors may exit through the secondary market (as these bonds would be listed in the stock exchanges) or through a buy-back facility specified by the issuer at the time of the offer. Four, the yield of the bond cannot exceed the 10-year government securities yield (prevailing in the month prior to the issue).
The investment angle
What do these bonds offer retail investors? The most notable feature of these bonds is the income tax deduction that they provide. The Government has enabled the bond issue through Section 80CCF of the Income Tax Act 1961. This primarily allows investors to take advantage of a deduction amounting to Rs 20,000 over and above the Rs 1 lakh limit under Section 80C. Besides, they provide a good diversification option.

While infrastructure bonds do not require credit rating, most of the existing companies that are eligible to issue the bonds rank high on credit worthiness. The IDFC issue, for instance, chose to get itself rated by ICRA and received a LAAA rating, the highest rating given by the agency.

Infrastructure bonds, therefore, also provide a relatively safe avenue for long-term investment. The bond also qualifies for any pledge, lien or hypothecation made by an investor to obtain loans from banks, after the lock-in period of five years.
However, there are some limitations as well. The bonds are unlikely to attract incremental investment over and above the tax deduction up to an investment of Rs 20,000. Two, given the five-year lock-in, it may not appeal to investors with short-term goals. Three, selling these bonds in the market post the lock-in would require investors to bear interest rate risk.

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