Take-off for India’s latest capital-raising scheme

In a bid to raise more capital to fund its burgeoning infrastructure sector, India has permitted the issuance of tax-free infrastructure bonds through infrastructure financing and insurance companies. According to the finance ministry, these bonds, with a minimum tenure of 10 years, are capable of raising more than $6.5 billion in the financial year 2010 to 2011.

According to the country’s central bank, the Reserve Bank of India (RBI), the following financial institutions have been classified as Infrastructure Finance Companies (IFCs) eligible to issue tax-free bonds: Infrastructure Development Finance Company (IDFC); Industrial Financial Corporation of India (IFCI); Life Insurance Corporation (LIC); and non-banking infrastructure finance companies (NBFCs) that get special approval. 

To make infrastructure bonds an even more attractive proposition to investors, India’s state-run Infrastructure Finance Company (IIFCL) is planning to start guaranteeing all infrastructure bonds issued in the country, a source from IIFCL told Infrastructure Investor. He said the company, which engages in long-term lending to infrastructure projects, is still waiting for the government to approve the proposition, which is likely to occur by the end of this month.

Bond launches underway

While IFCI recently launched tax-free bonds to raise up to $10.7 million, IDFC and LIC have also announced plans to launch similar bonds in the near future. According to Vikram Limaye, director of IDFC: “IDFC will launch the first tranche of these bonds in the first week of October. The amount is uncertain right now since we are waiting for some clarification from the Ministry of Finance. Depending on the clarification received from the Ministry, we will have capacity to raise either up to INR23.5 billion (€389.2 million; $511.3 million) or up to INR34 billion (€563.1 million; $739.7 million).”

Meanwhile, Larsen & Toubro and PTC India have been classified as Infrastructure Financing Companies (IFCs) by the RBI, which enables them to also issue tax-free bonds. A recent media report suggested that Larsen & Toubro is planning on launching bonds in the near future.  

A key question is how far will these bonds be able to meet the demands of India’s infrastructure sector? According to IDFC estimates, the potential market size for the bonds is between INR90 billion to INR150 billion. This is based on targeting approximately 6 million to 10 million potential taxpayers with each investing an average of INR10,000 to INR15,000. The maximum amount that can be invested with tax benefits by each taxpayer in India is INR20,000.

Fund managers canvassed by Infrastructure Investor generally view the initiative as credible and attractive. “From a government perspective it helps intermediate retail savings directly for infrastructure financing. As you know, there is a large amount of capital required to finance the country’s infrastructure development,” says Limaye.

He adds: “From the point of view of investors it is a very attractive instrument for deploying a portion of surplus liquidity to get incremental tax savings and contribute to the development of the country’s infrastructure. The tax-adjusted effective yield for the investor could be as high as 16 to 17 percent (for a coupon of 7.5 to 8 percent) if the investor holds the bonds for 5 years if the tax bracket of the investor is 30 percent.”

In the past few months, there has been a trend towards Indian infrastructure developers seeking to gain classification as IFCs.  This should make it easier for infrastructure companies to access funds at the same time as contributing to the overall growth of the economy (since infrastructure is India’s  second-largest sector after agriculture). However, more time is needed to judge how far the initiative will contribute to meeting India’s towering infrastructure ambitions.