In order to encourage retail participation, Indian Railway Finance Corporation (IRFC) is considering to offer higher interest rates to individual investors provided they hold its proposed tax-free bonds till maturity.
According to market players, the issue is likely to open for subscription on January 27 and close on February 10, 2012. The company which has been given the permission to raise Rs 10,000 crore this financial year will aim to raise at least half of the amount in the first tranche.
IRFC will pay coupon rates of 7.9 per cent for 10 years and 8.05 per cent for bonds maturing in 15 years. For retail investors the coupon rate is higher by 25bps. However, the coupon rate on the bonds will be restored to match other categories if they exit the investment by selling it in secondary market.
This is not the first time when there will be different interest rates for retail and non-retail investors. Higher interest rates were offered by the State Bank of India (SBI) in its retail bond issue last year. “In such issuances, investors from other categories end up buying the bond in the secondary market after allotment to individuals during the issue in order to take advantage of higher rates,” said a bond arranger.
It is the first time when such a condition would be put in place. “This is being done to promote retail participation and discourage such practices,” the official added. The company would keep a check when the bond is due for coupon payment each year. “So the individual will enjoy higher rate only if he/she was originally allotted the bond,” said the arranger.
Thirty per cent of the issue size has been reserved for retail investors and 25 per cent for high net worth individuals (HNIs). Corporate bodies and qualified institutional investors (QIPs) make up for the rest 45 per cent. The bonds have been rated ‘AAA’ by ratings agencies CRISIL and ICRA. SBI Capital, ICICI Securities and AK Capital are the lead arrangers to the issue.
Tax-free bonds differ from tax saving bonds. The interest income from the instrument is not taxed in tax free bonds. Also, there is no limit to what one can invest to enjoy the no tax benefit. This financial year, infrastructure companies like National Highways Authority of India (NHAI), Power Finance Corporation (PFC), Housing and Urban Development Corporation (Hudco) and IRFC were given permission to raise Rs 30,000 crore via tax free bonds.
This is IRFC’s first issue while others have tapped the debt market at least once so far this financial year. Last month, issuance of tax free bonds from NHAI had witnessed over subscription. The company offered coupon rates of 8.2 per cent for 10 years and 8.3 per cent for 15 years maturity. Retail investors were given allotment on pro rata basis while allotment was on the basis of ‘first come first serve’ in case of other categories. HNIs and QIPs had subscribed 2-3 times higher than the amount reserved for them.
Same was the case with the tax-free bond issue of PFC early this month. The infrastructure finance company got subscriptions worth Rs 9,791 crore, which is 2.4 times higher than the base size, within three days since the opening of the issue.
