IIFCL - Tax Free Bonds

Introduction: India Infrastructure Finance Company Limited (IIFCL), providing long term financial assistance to infra projects and wholly owned by the Government of India, has entered the debt capital market for the first time this fiscal, on 3^rd October 2013, with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures.

Issue Details: Issue, closing on 31^st October, has a size of Rs.500 crore, with an option in company’s hand to retain an oversubscription upto Rs.2,500 crore. Minimum application is Rs. 5,000 and in multiples of Rs. 1,000 thereafter, while allotment will be done on first come first serve basis. Being tax-free, the interest does not attract TDS nor do the bonds attract wealth tax. Also, the bonds do not have any lock-in period.

Rating: Bonds, rated AAA by CARE, ICRA and BWR, indicate highest degree of safety regarding timely servicing of financial obligations.

Listing: Bonds, proposed to be listed on BSE, are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Trading lot is one bond and must be necessarily in done demat form only.

What’s on offer: Bonds have three different series under which they are being offered:

*Retail investors defined as application upto Rs. 10 lakh from resident individuals, HUF, NRIs and QFIs being individual. 40% of the issue is reserved for retail investors. 

Rate of Return: This is the third tax-free bond issue this fiscal after REC (closed early on 16^th September) and HUDCO (scheduled to close on 14^th October). IIFCL is offering 8.75% coupon for 20 year period, which is comparable with HUDCO’s 8.74%. IIFCL’s 15 year coupon of 8.63% is much lower than HUDCO’s 8.76%. However, its credit rating of AAA is a notch better than HUDCO's AA+. But that should not be material, the issue being made by a public sector undertaking with a track record of successful bond issues.

The 20 year (Series 3) bonds, carrying the highest coupon rate, are comparable to a 12.66% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This is very attractive rate as currently no bank is offering double digit interest rates on long term deposits.

Previously issued (in 2012 and 2013) 20 year HUDCO bonds (maturing in 2033) are trading on BSE with yields of 7.80%-8.09%. Thus, current rates are significantly higher.

Recommendation: Considering the tax free income to be earned from the bonds, AAA rating, 20 year tenor with attractive coupon rate, coupled with likely falling interest regime scenario ahead, those looking for fixed asset allocation can subscribe to the series 3 bonds with tenure of 20 years.