The tax-free infrastructure bonds proposed in this year’s budget will have a minimum tenure of 10 years and a lock-in period of at least five years, allowing lenders to raise the much-needed long-term funds for the sector. The guidelines issued by the government on Friday said that only a select financial institutions will be allowed to issue these long-term infrastructure bonds.
Industrial Finance Corporation of India, Life Insurance Corporation of India, Infrastructure Development Finance Company and non-banking finance companies lending exclusively to infrastructure sector will be eligible to issue these bonds initially. Banks have not been allowed access to these bonds.
“These bonds provide an additional avenue to raise long-term funds for the infrastructure sector and to intermediate retail savings and channelise them into infrastructure sectors,” said Vikram Limaye, executive director and member of the board of directors, IDFC.
The government expects a $500 billion investment in infrastructure in the 11th Five-Year Plan ending March 2012, and has doubled the target to over $1 trillion for the 12th Five-Year Plan, 2012-17.
Investment up to a maximum of Rs 20,000 in these bonds will be eligible for tax benefits. The amount invested in these bonds will be allowed to be deducted from the income of the tax payers.
This Rs 20,000 investment in infrastructure bonds is outside the Rs 1 lakh maximum deduction allowed for investment in various schemes covered under sections 80C, 80CCC and 80CCD of the I-T Act. The yield would be linked to government securities of comparative residual maturity.
The investors will be able to exit these bonds only after five years on the secondary market if they are traded or go in for a redemption. Investors will also be able to raise debt from banks by pledging or hypothecating these bonds after the five-year lock-in.
There is a restriction on the amount these lenders can raise through these bonds — a maximum of 25% of their incremental lending to infrastructure sector over the previous financial year. They will also have to lend the funds so raised only to infrastructure sector, as defined by the RBI.
IDFC is likely to raise such bonds this fiscal. “I certainly hope that we will issue these bonds this fiscal. But I cannot comment on the exact timing of issuance at this point. There will be regulatory processes that need to be followed and the timing of issuance will also depend on market conditions and investor demand,” Mr Limaye said.
As with most financial investments, it will be mandatory for the subscriber to furnish permanent account number to the issuer for investment in the bonds.
Value Research CEO Dhirendra Kumar said investors must be careful while investing in these bonds, particularly those by the eligible NBFCs. “The tax incentives can be easily confused as some sort of sovereign guarantee. These are 10-year bonds with significant risks,” he said.
According to tax experts, the tax incentives may have to be reworked for these bonds as there is no mention of them in the draft direct taxes code. The code envisages an incentive regime in which only long-term retirement savings are incentivised.