Core sector bonds may be tax-free

RUN-UP TO THE BUDGET

In a move that will have major implications for infrastructure financing in India, the finance ministry and the Reserve Bank of India are discussing the possibility of allowing tax-exempt status to long-term infrastructure bonds raised by commercial banks.

Sources said Finance Minister P Chidambaram might make an announcement in this connection in Budget 2007-08, as part of his overall strategy for raising long-term finance for infrastructure.

The tax exemption on such bonds, which cover tenors of 10 to 20 years, is considered the key to mopping up savings from the general public. Though banks are eligible to issue infrastructure bonds under RBI guidelines, none have done so for lack of appetite from retail buyers.

"Making infrastructure bonds eligible for tax exemptions will put them on a par with other tax-saving instruments," said a public sector bank chief. Major banks like ICICI Bank and IDBI said they would raise around Rs 4,000 crore each through infrastructure bond issues if the government provided tax benefits for investors in these longer-term instruments.

Many commercial banks have a large exposure to the infrastructure sector, but face an asset-liability mismatch because they mobilise short-term deposits, whereas infrastructure lending is typically long term.

Infrastructure funding, which the government is focussing on to sustain 9 per cent economic growth, is likely to figure prominently in the Budget. Chidambaram has said the infrastructure sector needs nearly $320 billion over the next five years.

In December last year, he appointed a committee headed by HDFC Chairman Deepak Parekh to suggest new instruments and measures to finance infrastructure development. The group is yet to submit its report.