India to issue tax-free infra bonds

India’s finance ministry has decided to issue tax-free infrastructure bonds through infrastructure financing and insurance companies with a minimum tenure of ten years. But a limit has been placed on the number of these bonds that a company can issue during 2010-11.

The Indian government has decided to issue tax-free infrastructure bonds with a minimum tenure of ten years in order to boost the infrastructure sector.  However the finance ministry has placed a limit on the number of bonds that infrastructure finance companies can issue during 2010-2011, a spokesperson from the Central Board of Direct Taxes (CBDT) told

He said that the number of bonds issued by a company for 2010-11 will be restricted to 25 percent of the incremental infrastructure investments made by the issuer during 2009-10.

The bonds, which have the potential to raise about $6.5 billion in fiscal year 2010-11, according to government estimates, will make investments in roads, ports and power plants in India. The purpose of these funds is to encourage investment and bridge the gap in India’s infrastructure sector.

The government has specified as qualified for tax exemption bonds to be issued by Industrial Finance Corporation of India (IFCL), Life Insurance Corporation (LIC), Infrastructure Development Finance Company (IDFC) and a Non-Banking Finance Company classified as an Infrastructure Finance Company by the Reserve Bank of India (RBI), according to a statement by the finance ministry.

According to the statement, the tenure of the bonds will be a minimum of ten years with a lock-in period of five years for an investor. A lock-in period is a time during which a loan cannot be paid-off earlier than scheduled without incurring penalties.

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.