SREI infra bonds - Should you subscribe?

Earlier, IFCI, IDFC and L&T Infrastructure had tapped the market to raise funds through long term infrastructure bonds. IFCI had offered coupon rates of 8.50% and 8.75% for a tenure of 10 and 15 years respectively, while IDFC and L&T Infra offered a coupon rate of 9% for a tenure of 10 years. Now, SREI Infrastructure Finance is tapping the market, offering a better coupon rate than its peer-group companies.

Long term infrastructure bonds come are covered section 80 CCF of the Income Tax Act, 1961. As per the existing norm, investments in these bonds are eligible for Income Tax deduction of Rs 20000 in addition to the limit of Rs 100000. The bonds can be issued by IFCI, LIC and IDFC as well as by Non Banking Finance Companies (NBFCs) that are classified as an infrastructure finance companies by the RBI. The bonds will be available for a minimum tenure of 10 years, and have a lock-in period of 5 years. Only Resident Individuals (major) and HUFs can invest in these bonds. However, the interest earned on these bonds is taxable.

SREI Infrastructure Finance is tapping the market to raise funds upto Rs 300 cr through long term infrastructure bonds. The funds raised through the issue will be used towards infrastructure lending by the company. The application amount is of a minimum of Rs 1000 (1 bond) and multiples thereafter. The issue opened on Dec 31, 2011 and will close on Jan 31, 2012.

Investors have 4 options to choose from. The 1st and 2nd options are for a tenure of 10 yrs, with a coupon rate of 8.90%, while the 3rd and 4th options are for a tenure of 15 years, with a coupon rate of 9.15%. In the 1st and the 3rd options, interest will be paid annually, while the 2nd and 4th options offer cumulative interest payment. The company also has a buyback option at the end of 5 years. The bond will be listed on the Bombay Stock exchange (BSE). However, investors must remember that the bond comes with a lock-in period of 5 years.

Listed below are the options which are available to investors:

SREI Infra is offering the best coupon rate for investors as compared to the infra bonds issued by the other companies. The interest rates on infrastructure bonds is based on the long-term govt. bonds. We hold that going forward, with the softening of govt. yield, companies would most probably come up with coupon rates that will be lower than that offered by SREI Infra. However, those who have missed the earlier opportunities should invest in these bonds now to avoid last-minute tax planning hassles.

We, at DSIJ, believe that investors should select Option III and also should opt for the buyback option at the end of 5 years, which will help them to achieve the best possible returns.