L&T
Introduction
L&T Infrastructure Finance Company Limited (L&T Infra), NBFC and infrastructure-financing arm of L&T Financial Holdings, has entered the debt capital market, for the second time, with a public issue of long term infrastructure bonds of face value Rs. 1,000 each, in the nature of secured, redeemable, non-convertible debentures, having benefits under section 80CCF of the Income Tax Act 1961 for individuals and HUFs, on 25th November 2011, with an aim to raise Rs. 1,100 crore.
Minimum application amount is Rs 5,000 (i.e. 5 bonds) and in multiples of Rs. 1,000 (i.e. 1 bond) thereafter. The issue closes on 24th December 2011.
Credit Rating and Listing
The issue, rated 'AA+' by CARE and ICRA, indicating high degree of safety for servicing of financial obligation, will be listed on BSE. However, the bonds would be tradable only after expiry of the 5 year lock-in period. There is also a buy-back option in the hands of the company on expiry of 5 years as well as 7 years. The bonds, although available now in both demat and physical form, would be traded later only in the demat form.
Company Overview
Having raised Rs. 656 crore via a similar retail issue last fiscal, company is also exploring fund raising via the ECB route in near future to meet its fund requirements. L&T Infra has a loan book of Rs. 8,790 crore. For FY11, company earned total income of Rs. 704 crore and net profit of Rs. 200 crore. With current networth of Rs. 1,487 crore and gross NPAs of 0.88%, the company enjoys healthy financial position along with L&T's strong pedigree.
Tax Benefits
Long term infra bonds are debt instruments wherein investment upto Rs 20,000 is eligible for tax rebate under section 80CCF of Income Tax Act, 1961. This Rs. 20,000 limit is over and above the normal investment limit of Rs 1 lakh available under section 80C of the Act.
If an investor falls under the highest tax bracket, paying income tax at 30.9%, and invests Rs. 20,000 in these bonds, he saves Rs. 6,180 (30.9% of Rs. 20,000) at the time of making the investment, reducing the FY12 tax outgo by Rs. 6,180. For those in the lowest tax slab of say 10.3%, tax savings accrue to the extent of Rs. 2,060 in the year of making investment, while those in the 20.6% tax bracket can save upto Rs. 4,120 through Rs. 20,000 investment in these bonds. Note that the interest earned on the bonds is liable to tax.
Interest Rate
The current bonds on offer carry a coupon rate of 9% (In case of long term infra bonds, a company cannot offer coupon (interest rate) that is higher than the yield of 10-year government bonds, pegged at 30 days prior to launch). The company is offering bonds in two different series, with frequency of interest payment being annual and cumulative:
| Particulars | Series | |
| I | 2 | |
| Frequency of Interest Payment | Annual | Cumulative |
| Tenor | 10 years | 10 years |
| Lock-in period | 5 years | 5 years |
| Buy-back Option | Yes (after 5 / 7years) | Yes (after 5 / 7years) |
| Buy-back Amount | Rs. 1,000 | Rs. 1,539 (5 years); Rs. 1,828 (7 years) |
| Interest Rate / Yield to Maturity* | 9% per annum | 9% pa compounded annually |
| Maturity Amount | Rs. 1,000 | Rs. 2,367 |
* Yield on buy-back is same as yield to maturity for both the series
If one has to decide between the two series, cumulative interest payment is a better option as it benefits from the power of compounding. Also in the current macro environment, when interest rates have peaked and are likely to start their downward march, parking funds in fixed return investment at higher interest rate makes sense.
Rate of Return
The most attractive point of these infra bonds is the 'real returns' which one earns, factoring-in the tax deduction. To simplify, say a tax-payer falling in the highest tax slab of 30.9% has invested Rs. 20,000 in the bonds. His initial tax outgo is thus lower by Rs. 6,180 (30.9% tax savings on Rs. 20,000). He earns annual interest of Rs. 1,800 (9% of Rs. 20,000) on investment of Rs. 13,820 (20,000 - 6,180), resulting in an effective rate of return of 13.0%.
In addition to the above, the investor will receive Rs. 20,000 and not net investment amount (Rs. 13,820 for those falling under 30.9% tax bracket) at the end of the tenor or on buy-back, thus resulting in a higher rate of return. Thus, adjusting for both the items above, 30.9% tax paying investor will earn an effective rate of return of 15.19% in 10 years and 19.11% in 5 years for Series 1 bonds.
Conclusion
These bonds become an attractive choice once the Rs. 1 lakh investment limit is exhausted by a tax-payer. Although there is no cap on the amount that can be invested, tax benefit under Section 80CCF will be restricted to the amount of Rs. 20,000 only. Those looking at tax planning can begin investments with these infra bonds. Nevertheless do bear in mind that more such bond issues are expected in the coming few months as the financial year-end nears.