Infrastructure Bonds India

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In 2013-14, the government allowed 13 public sector institutions to raise Rs 48,000 crore through tax-free bonds to meet their investment needs.

Recently, the RBI has allowed banks to float infrastructure bonds up to seven years, if they extend home loans for affordable housing, that is, to individuals up to Rs 50 lakh (for houses of value up to Rs 65 lakh) in metros and loans up to Rs 40 lakh (home value Rs 50 lakh) As per the new order long term bonds will now be exempted by the RBI from mandatory reserve requirements like CRR and SLR if the money raised is used for funding of such projects.

Thus, banks can sell long-term bonds to boost funding for infrastructure and affordable housing. The rupee-denominated bonds will have a minimum maturity of seven years and will be free from cash reserve and statutory liquidity ratio requirements and also so-called priority sector lending targets.

Bond sales can be done through public issuance or private placement, the central bank added. Under current rules, banks must keep a portion of bonds sold with the RBI as reserves.

Infra bond details
The money generated through these bonds is used to create important structures like roads, ports, airports, and power plants. The long term nature of investment means that they are available in maturity periods of 10 and 15 years. However, an investor cannot ask for tax exemption if he or she has not invested for a period of at least 5 years.

Normally, the public sector organizations offer better interest rates compared to the governmental entities. As per laws, interest earned from these bonds will be subjected to taxes just like the fixed deposits that offer tax benefits. This means that their actual return varies from anywhere between 5 and 8 percent.

This means it is slightly less advantageous than other investment options such as PPFs, NSCs, and fixed deposits in that regard. The fact that infra bond investors are not secured against inflation accounts for the variable returns as well.

This is also a major reason why various tax payers have different earnings from the same infra bonds. These bonds are normally issued at different times in a year. Liquidity can often been a thorn in the investors side but experts say that since they are issued several times a year they can avail these opportunities at their convenience.

The analysts say that it is safe to put in not more than 20,000 in these bonds for the same reason. Investors can sell back their infra bonds or sell it in the financial markets once the starting period of 5 years is over.

Top Infrastructure Bonds
Following are the best infra bonds in India:

  • IDFC Infrastructure Bonds
  • L&T Infrastructure Bonds
  • IDBI Flexibonds
  • IIFCL Long Term Infrastructure Bonds
  • IFCI Infrastructure Bonds
  • ICICI Safety Bonds
  • REC Tax Saving Infrastructure Bonds

Right now, IFCI is providing the best in terms of interest rates with 9.09% for its 10 years bonds and 9.16% for the 15 year infra bonds. REC investors can expect a rate of 8.95% for the 10 year bonds, PTC India Financial investors will receive 8.93% for the same bonds, and for the SREI Infra Finance investors the rate is 8.90%. The rate for 15 year bonds for the three companies is 9.15%.

REC enjoys a credit rating of AAA, which implies that it offers the most security for its investors especially in factors such as timely repayment of principal and interest. Following are the ratings details of some other infra bond issuing organizations:

  • IFCI - AA- (from Brickwork Ratings), CARE A+ (from CARE), LA (from ICRA)
  • PTC India Financial Services - A+ (from both CARE and ICRA)
  • SREI - AA (from CARE)

Experts think that investors get the maximum security from REC and IFCI as they are government owned.

IDFC Infra Bonds
  • Interest rate - 8.70%
  • Eligible for maximum tax benefit of INR 20,000
  • AAA rating by ICRA and Fitch
  • Lock in period - 5 years
  • Can be sold at both NSE and BSE after lock in period

How to choose infra bonds
An investor needs to compare the returns being provided by various companies issuing the infrastructure bonds and check out their credit rating. Experts opine that an investor should also keep in mind the latest financial performance of a company before buying its investment instruments.

How to invest in infra bonds
Investors looking to make the most of their money in infra bonds are often asked to put 50% of the deductible money in the 10 year bonds and the rest in the 15 year bonds. But experts opine that since 20,000 is a small amount it is better to not split it as it may not be tracked properly.

Last updated On: July 17, 2014

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