The optimum utilisation of the enhanced Rs 60,000-crore limit for issuing tax-free infrastructure bonds by companies seems unlikely. This is despite the government trying hard to boost infra development in the country by doubling the issuance limit for such bonds, which received a euphoric response in 2011-12.
Firms that secured approvals to raise funds are unsure if these would be able to harness the entire available limit, owing to delays in decision making by the government and the increase in bank rate.
Companies like National Highways Authority of India (NHAI) and Indian Railways Finance Corporation (IRFC), which had been allowed to raise Rs 10,000 crore each through the issuance of tax-free bonds, have just begun the absorption process for the amount raised in 2011-12, and this may take a while. For financial year 2012-13, these have again been permitted to issue tax-free bonds up to Rs 10,000 crore each.
Speaking to Business Standard, J N Singh, member (finance), NHAI, said, “We have just finished raising funds for this financial year. It would take time for us to absorb the amount. There are no plans to come up with another tax-free bond issue anytime soon. We are not sure if we would be using the entire Rs 10, 000-crore limit, as we will have enough funds for some time.”
Project delays and slow allocation may also lead to postponing tax-free bond issuances. The Economic Survey 2011-12 says 235 of 583 infrastructure projects were delayed, while 175 were sanctioned without specifying a commissioning schedule.
Delay by the government in notifying the final go-ahead to tax-free bond issuances may also lead to underutilisation of the limit. S Radhakrishnan, general manager (external commercial borrowing), IRFC, said, “Though we would want to issue tax-free bonds to raise funds before exercising other options to raise money, the timing depends solely on how fast the finance ministry issues the notification on it. In FY12, the notification was issued very late, in September, and our issuance limit for tax-free bonds remained untapped, as we had used alternative means to raise funds.” The firm raised Rs 14,800 crore this financial year from various sources, including tax-free bonds, which helped raise about Rs 7,000 crore.
Though tax-free bonds are seen as low-cost tools to raise funds, arrangers of these issues disagree. Nirav Dalal, president and managing director (debt capital markets), YES Bank, said, “The doubling of the issuance limit for tax-free bonds is a boost for infrastructure funding, though a bit surprising. The bonds issued this financial year have given merely 1-1.25 per cent cost benefit to issuers. Inadvertently, the instrument has turned out to be more attractive for investors than for issuers.”
He said it was not a good idea to issue tax-free bonds in the beginning of FY13, as interest rates were still high. According to norms, companies cannot invest in corporate bonds that offer a coupon rate less than the bank rate. The bank rate is linked to the repo rate and market players believe the rate cycle has peaked.
In February, the Reserve Bank of India had raised the bank rate from six per cent to 9.5 per cent, bringing it on a par with the marginal standing facility rate.
“With the bank rate now at 9.5 per cent, companies cannot invest in instruments with coupon rates less than the bank rate. So, if the coupon offered on these tax-free bonds remains in the range of 8.3-8.5 per cent, companies cannot invest in these, and the amount to be raised would be quite large to be sourced primarily through retail/high net worth investors,” Dalal said.
The coupon rate on tax-free bonds is linked to the yields of government securities of the same tenor.
These rates should not be less than 100 basis points lower than the annualised closing yield on the government bond of the previous month.
