IFCI to raise over $10m through tax-free bonds

Development institution Industrial Finance Corporation of India is looking to raise up to $10.7m via tax-free bonds. In related news, India’s Infrastructure Finance Company, a state-backed infrastructure lender, is waiting for government approval to start guaranteeing all infrastructure bonds issued in the country.

Updated amount to be raised from tax-free bonds to INR500 million (€8.4 million; $10.7 million)

Indian development institution Industrial Finance Corporation of India (IFCI) is hoping to raise up to INR500 million (€8.4 million; $10.7 million) by issuing tax-free infrastructure bonds, a senior official from IFCI told Infrastructure Investor.

IFCI tower in
New Delhi

“INR500 million is to be raised with a green-shoe option. Each bond will be issued for INR5000,” said IFCI’s Gopal Singh. A green-shoe option is a provision in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer.

Singh added that the bonds will be issued for a period of ten years with a five-year lock-in period. The funds raised will be used to help finance infrastructure projects via equity investments and debt loans, he added. The company started issuing bonds on August 9 with the closing date for the issue set for August 31, IFCI said in a note on its website.

IFCI was India’s first development institution set up by the government in 1948 to provide assistance to India’s industrial sector via long-term loans. Since then, it has also lent to several other sectors including energy and infrastructure.

Recently, the Indian government announced it would allow tax-free infrastructure bonds to be issued by IFCI, Industrial Finance Development Corporation of India, Life Insurance Corporation, and other non-banking finance companies classified as an Infrastructure Finance Company by the Reserve Bank of India (RBI).

The number of tax-free bonds issued by any company has been restricted by the RBI to 25 percent of the incremental infrastructure investments made by the issuer during 2009 and 2010.

The tax-free bonds will have a minimum tenure of 10 years and have the potential to raise about $6.5 billion over 2010 and 2011. Their purpose is to encourage investments that help bridge the gap in India’s infrastructure sector.

To make infrastructure bonds an even more attractive proposition to investors, India’s state-run Infrastructure Finance Company (IIFCL) is also planning to start guaranteeing all infrastructure bonds issued in the country, a spokesperson from IIFCL told Infrastructure Investor.

He said the company, which lends long-term to infrastructure projects, is still waiting for the government to approve the proposition, which is likely to happen by the end of next month.

SK Goel, chairman and managing director of IIFCL, explained to Reuters how the mechanism will work:

“We will enhance the ratings of the project developers by giving our unconditional guarantees for the repayment of their bonds and their interests,” Goel said. He added that IIFCL is looking to raise INR30 billion of tax-free bonds between October and March 2011, after it gets approval from the finance ministry.

India has targeted an ambitious $500 billion of infrastructure investment in its five-year plan to 2012 and $1 trillion by the end of 2017. It is looking for heavy private investment in order to reach these targets.