Tax-free infra bonds capped at 25% of investment

An infrastructure finance company can issue only 25 percent of its incremental investment as tax-free infra bonds in a year, says the finance ministry.

"The volume of issuance (of tax free bonds) during this financial year will be restricted to 25 percent of the incremental infrastructure investments made by the issuer during the fiscal 2009-10," a senior finance ministry official told PTI.

This means that if an infrastructure finance company (IFC) invested Rs 70 crore in infrastructure in FY09 and Rs 100 crore in FY10, then it can issue bonds only worth 25 percent of Rs 30 crore in FY11. And, in case it invested less or equal, then no bonds can be issued.

"The objective is to link an IFC's level of activity in the infrastructure sector with the amount it plans to raise through bonds," said Infrastructure Development Finance Company (IDFC) executive director Vikram Limaye.

The government on Friday allowed IFCI, LIC, IDFC, and non-banking finance companies classified as IFCs to issue tax-free infra bonds.
     
"The government wants to step up infra investments to ensure expansion of the sector. Continuous incremental spending would ensure that funds are channelised properly," SMC Capitals equity head Jagannadham Thunuguntla said.
     
Further, to ensure that the proceeds of the issue gets invested in the infrastructure sector, the government has also mandated that the funds thus raised has to be utilised towards lending into the sector. "The proceeds shall be utilised towards infrastructure lending as defined by the RBI," the official said.
    
"To ensure aggressive deployment of funds and cut down on execution delays, the Centre has mandated that the funds raised be utilised when raised," Thunuguntla said.
    
Sources said IFCs will have to invest in loans, bonds, other forms of debt and equity. Finance minister Pranab Mukherjee had earlier said public and private sector firms would be allowed to raise funds through long-term infra bonds.
    
The Centre expects $500 billion investment in infra in the 11th Plan period ending March 2012, and has doubled the target to over $1 trillion for the 12th Plan.
    
To promote infra investment, the 2010-11 budget proposed to exempt investment up to Rs 20,000 in long-term infra bonds from income tax. The amount is in addition to the existing overall tax exemption limit of Rs 1 lakh per annum for personal income taxpayers.
    
The bonds will have a tenure of 10 years with a minimum lock-in period of five years. It means that investors will not be permitted to redeem the bonds before five years.