Long term infra bonds - L&T Infra, SREI Infra

A long-term infrastructure bond is covered under Section 80 CCF of the Income Tax Act, 1961. Any investment in such a bond provides an income tax deduction of Rs 20,000 over and above of Rs 1 lakh available under Section 80 C. The bonds will be available for a minimum tenure of 10 years and with a lock-in period of five years. Only resident individual (major) and HUF can invest in these bonds. However one should note that the interest earned on these bonds are taxable.

Companies like L&T Infra and SREI Infra have tapped the market to raise funds through the route of long-term infrastructure bonds. For L&T this is the second such bond in this financial year while SREI has raised it for the first time in FY12. L&T Infra has plans to mobilise Rs 1,100 crore in FY12 through the issuance of infra bonds. In the first tranche, L&T had mobilised approximately Rs 530 crore. Of this approximately 71 per cent of the subscription was for the second option i.e. cumulative interest payment. This helps us to understand that the investors are confident about the company’s fundamentals and will take up the entire amount (principal + interest) at the time of maturity or at the buy-back stage.

With the interest rate softening, the company this time is offering a coupon rate of 8.70 per cent which is lower by 30 basis points with respect to the earlier issue. The other aspects of the bond are similar to their first tranche issue. It has two options with one having interest paid annually while the other is cumulative, both having a tenure of 10 years. It has a buy-back option at the end of the 5th and 7th year. The minimum application amount is Rs 5,000 (i.e. five bonds) and then in multiple of one bond (Rs 1,000). The issue has already opened on January 10, 2012 and will be closed on February 11, 2012.

SREI Infrastructure Finance is tapping the market to raise funds up to Rs 300 crore through long-term infrastructure bonds. The minimum application of the amount is Rs 1,000 (i.e. one bond) and investors can apply in multiples thereafter. The issue has already opened on December 31, 2011 and will be closed on January 31, 2012.

There are four options available for the investors. The first and the second are for a tenure of 10 years having a coupon rate of 8.90 per cent while the third and the fourth options are for a tenure of 15 years having a coupon rate of 9.15 per cent. Also, in the case of the first and the third option interest will be paid annually while the second and fourth option has cumulative interest payment. The company also has a buy-back option at the end of five years. The bond will be listed on the Bombay Stock Exchange (BSE).

Investment in either of the company could be considered good. L&T’s coupon rate is lower than that of SREI. The coupon rate of 9.15 per cent for a 15-year period is really attractive for investors. However, L&T has an edge over SREI when it comes to fundamentals and the management of the company. One should even note that L&T is offering a buy-back option at the 7th year which is not offered by SREI.

The interest rate on infrastructure bond is based on a long-term government bond. We believe that with the softening of the government yield, companies going forward would most probably come with a coupon rate which will be lower than or will be at the similar kind of rates which the companies are offering now.

We believe that those who missed the earlier opportunities should now invest in these bonds which will avoid last-minute tax planning. One should opt for annual interest payment and the buy-back option at the end of the fifth year (in either of the companies) which will help them to achieve the best possible returns.

Given below is a table indicating the various options available for investment: