India has an undeniable need to create physical infrastructure to be able to sustain the GDP growth of 9%-10%. However, infrastructure projects are always capital intensive in nature and therefore require huge investments. Since the gestation period on these projects is usually longer; raising financial resources becomes difficult for many of the companies engaged in creating infrastructure facilities. However, there have been many state-run as well as private Non-Banking Finance Companies focusing on infrastructure funding. In Union Budget 2012-13, the government had fixed a target of raising Rs 60,000 crore through PSUs via issuance of tax free bonds.
Indian Railway Finance Corporation (IRFC) is a Government owned enterprise and a financing arm of Ministry of Railways devoted exclusively to raise money from the market. The money raised by IRFC is utilised to meet developmental needs of Indian Railway and also to acquire rolling stock assets such as locomotives, coaches and wagons. As a part of its business activity, the company has planned to raise Rs 1,000 crore (with an option to retain oversubscriptions upto Rs 8,886 crore) by issuing secured non-redeemable tax free bonds of Rs 1,000 each.
|Issuer||Indian Raliway Finance Corporation Limited|
|Issue Size||Rs 1,000 Crore with a green shoe option to retain subscriptions upto Rs 8,886 crore|
|Nature of the issue||Public issue of the tax free bonds in the nature of secured redeemable non-convertible bonds|
|Credit Rating||"CRISIL AAA/Stable" by Crisil, "[ICRA] AAA" by ICRA and "CARE AAA " by CARE|
|Issue Opens||January 21, 2013|
|Issue Closes||January 29, 2013|
|Issue Price||Rs 1, 000 each bond|
|Tenure||Series 1- 10 Year, Series 2-15 years|
|Coupon rate||Series 1- 7.18% p.a.; Series 2- 7.34%p.a.|
|Additional Rate||0.50% shall be paid to original Allottees of category IV *|
|Interest Payment||October 15 every year|
|Min. Application||5 Bonds (Rs 5,000) and in multiples of 1 bond thereafter|
|Mode of Holding||Physical and Dematerialised Both|
|Depositories||NSDL and CDSL|
|Trustee||SBICAP Trustee Company Limited|
|Quota||40% for category Iv investors and 30% for category III investors**|
|* Resident Individual Investors, Eligible NRIs on a repatriation or non repatriation basis and Hindu Undivided Families through the Karta applying for Bonds aggregating up to and including Rs. 10 lakhs across all Series of the bond issue.|
|* * Resident Individual Investors, Eligible NRIs on a repatriation or non repatriation basis and Hindu Undivided Families applying for Bonds aggregating for not more than Rs. 10 lakhs across all Series of the bond issue.|
The company is engaged in funding infrastructure activities of Indian Railways. IRFC has catered to almost 1/4th of the planned outlay of the ministry of Railways so far. Share of IRFC in funding high capacity wagons and high horse power locomotives is substantial. About 50% of the rolling stock assets that still earn revenue and have been operational in Indian Railways network are funded by IRFC. Till 31st March, 2012, Rolling Stock assets valued at Rs. 82,447 crore have been added to the asset base of the Indian Railways with funding assistance from IRFC.
A single client exposure of the company, which otherwise would be construed as a threat, works in its favour. Since the Indian Railways, another government enterprise is the only borrower; default risk that IRFC is exposed to is significantly low.
In our opinion IRFC tax free bond provides an excellent investment opportunity as the rates offered are quite decent. Moreover, there's no restriction on a bondholder to hold bonds mandatorily for a particular period of time. Investors may sell or buy these bonds anytime on the exchanges. Hence investors need not worry much about liquidity in case of immediate need for funds.
The ticket size has been purposefully kept lower for greater retail participation and thus it is well within the reach of retail investors. Further, the quota of 40% reserved for retail investors enhances the chances of getting allotment.
For category IV investors, i.e. those who invest less than or equal to Rs 10,00,000; incentive of 0.5% is being offered over and above the coupon rate. For a person who invests as a category Iv investor and falls in the maximum tax bracket, gross pre- tax yield comes in the range of 11.1%- 11.4% for bonds with maturity profile of 10 years and 15 respectively. Considering the risk one is exposed to, coupons offered by IRFC (when clubbed with tax exemption benefit) are satisfactory. We believe that IRFC tax free bond is an attractive offering considering the rating profile of the issue and competitive yield (compared to post tax yield on other fixed income instruments) for those in the maximum tax bracket.
Since the issue can also be availed by NRIs; international rating of IRFC should also be considered. Standard & Poor's, Fitch and Moody's - have awarded IRFC the rating of "BBB-(Negative)", "BBB-(Negative" and "Baa3(stable" ratings respectively. The ratings offered by independent international rating agencies are comparable to that on India's sovereign debt.
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