Dr. Sanjiv Agarwal
While Indian economy is on a growth track, infrastructure development is bound to happen and this is possible only when adequate funds are arranged .Bonds offer an answer to the financial needs for such projects.
In 2010 Budget, infrastructure bonds were announced as one of the tax saving options to assessees whereby under section 80CCF of the Indian Income tax Act, investment upto Rs 20,000 in notified infrastructure bonds was allowed tax benefit by way of reduction from total taxable income. This is over and above Rs one lakh tax benefit available under sections 80C, 80CCC and 80 CCD.
Presently, one such bond issue on the offer is from IDFC ( Infrastructure Development Finance Corporation ), a corporation promoted by Central Government holding 20 percent equity stake, wherein investors can invest upto 22nd October and enjoy the tax benefits. The bonds have the highest rating of ‘AAA’ which a bond can get and have a maturity period of 10 years. ‘AAA’ implies highest credit quality rating with stable outlook. Moreover, IDFC bonds are fully secured by way of first charge created over secured assets and immovable properties of IDFC. These can be issued in both, physical and demat mode and the interest will be credited through ECS in the bank accounts of the investors. Thus, even those who do not have a demat account can invest in IDFC bonds.
Only individuals and Hindu undivided families can make investment in IDFC bonds. The investible amount has been kept at as low as Rs 5000 per bond and one can invest for a minimum of two bonds ( ie, Rs 10000 ) or more in multiples of one bond or Rs 5000. There is no maximum limit on investment but tax benefit can be taken only for Rs 20000.
From return perspective, IDFC bonds offer four options – simple annual interest of 8 percent, cumulative interest of 8 percent compounded annually, simple annual interest of 7.5 percent with buy back option after 5 years and cumulative interest of 7.5 percent compounded annually with buy back option after 5 years. It is interesting that tax adjusted returns are attractive which at 30percent income tax slab means a post tax return of 13.89 %, 12.06 % , 17.19 % and 15.74 % respectively in the four options. This implies that these bonds are much better than the fixed deposits. In IDFC bonds, while lateral shift is not permitted, one can also invest in different options.
The bonds will be traded on BSE and NSE after the lock in period and those under buy back scheme will be redeemed by the IDFC. However, on the fillip side, these bond being capital market instruments with lock in, can not be pledged or hypothecated for obtaining loans during the lock in period of five years. All in all, investment id IDFC bonds make a good investment from safety, liquidity, return and taxation view point in today’s scenario.
Those who can not invest now need not worry as few such bond issues are bound to open in next few weeks, viz, from India Infrastructure Company ( IIFC ), Life Insurance Corporation of India ( LIC ), Rural Electrification Corporation Ltd (REC) etc. If the interest rates move up, which are likely, it may benefit the investors who apply in those issues.
Country’s largest bank, State Bank of India’s long term bond issue of Rs 1000 crore has also been announced. SBI is offering a coupon of 9.25% for 10 years term and 9.50% for a 15 year term. While these bonds are for a long term, this time, bank has ventured to tap the retail investors to subscribe to the bonds for the first time. Though the interest rates may look attractive for the present, this attraction may not sustain over a time horizon of 10 and 15 years. Upward movement in rates is not ruled out but at the same time committing funds for 10 or 15 years in a inflation hit economy may not be wise. One would also loose the investment opportunities, if any during this period.
The bonds being offered by SBI from 18th October till 25th October will be allotted on ‘first come first serve’ basis. One good this about these bonds is that these come without any lock in period and shall be listed on National Stock Exchange. Thus, the liquidity is assured but whether such liquidation will be at a premium or discount would much depend on interest rate scenario and residual life of bonds. However, It will provide long term funds to bank at reasonable rates for on lending of long term loans to housing loans and infrastructure projects.