NHAI, IRFC to raise tax-free bonds worth Rs 30,000 cr in FY16

Tax-free bonds for retail investors might soon be back, after a gap of one year.

National Highways Authority of India (NHAI) and Indian Railway Finance Corporation (IRFC) have received in-principle approval from the government to raise Rs 24,000 crore and Rs 6,000 crore, respectively, via this route.

NHAI and IRFC confirmed to Business Standard about the provisional allotments granted last Friday. As the returns from these bonds are linked to the yield on the 10-year government securities, these are likely to fetch 7-7.25 per cent per annum, lower than the 8.5-9 per cent the bonds offered in 2013-14, if the same pricing criteria is retained.

“The provisional allotment is for Rs 24,000 crore and even in the final allotment, the amount is likely to be same,” said a senior official of NHAI. A senior IRFC official said as soon as the final nod comes, they might move to raise the amount. Final nod is likely in a month.

The Union Budget had announced tax-free bonds for infrastructure projects and these bonds are making a comeback of sorts. These were absent from the market in the previous financial year.

IRFC is also planning to raise up to $1 billion through offshore rupee bonds, making it the first domestic issuer after the Reserve Bank of India (RBI) gave the nod to Indian companies to use this route, in the first bi-monthly monetary policy review of FY16 announced earlier this month. “We have received the board approval for this amount. But what is important for us is that the cost of these bonds should work out to be cheaper than domestic bonds. If we get that advantage, we can think of raising even beyond $1 billion through this route,” said the official.

In FY14, tax-free bonds were mopped up by investors much before issue closing dates. Experts said it would be successful even in the current financial year. “Since the limit is only Rs 30,000 crore, it will be easily absorbed by investors,” said K P Jeewan, head of fixed income, Karvy Stock Broking. “If the previous pricing criteria is maintained, the bonds will be sold very easily. The pre-tax returns on these bonds work out to be about 10 per cent in a 30 per cent tax bracket. That is an attractive investment proposition.”

Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities, said if these bonds hit the market by May-June and by then if RBI has not gone for another rate cut, investors might find the instruments attractive. This is because inflation will be under control and the central bank might cut interest rate further. “It will be a good investment option for investors willing to lock-in their investments for longer duration. But the issues should happen as fast as possible,” he said.

Since the start of 2015, RBI had cut repo rate, or the rate at which banks borrow from the central bank, by 50 basis points to 7.50 per cent.