IDFC Tranche 2 - Infrastructure Bond

Infrastructure Development Finance Company (IDFC) in December 2011 had tapped the market with its first tranche to raise funds up to Rs 5,000 cr in FY12. The company is hitting the markets with its second tranche now. Tranche 1 was subscribed for an aggregate amount of Rs 532.62 cr. Therefore, this tranche is expected to raise funds approximately up to Rs 4,400 cr. We believe that the second tranche will most probably not be fully subscribed and the company may hit the market in March with its third tranche. However, investors should not wait for the next tranche and invest right now as with the softening of interest rate on government bonds, the coupon rate will, in the future, be most probably less than the current rate or will be at similar levels.

A long-term infrastructure bond is covered under Section 80 CCF of the Income Tax Act, 1961. An investment in such a bond provides 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 tenure of minimum 10 years and with a lock-in period of five years. Only resident individuals (major) and HUFs can invest in these bonds. Note, however, that the interest earned on these bonds is taxable.

After meeting the issue-related expenses, the funds raised will be used towards infrastructure lending. The minimum application for the bond is of Rs 10,000 (two bonds of Rs 5,000 each) and the application can be made in multiples of one bond (face value of Rs 5,000) thereafter. The issue has already opened on January 11, 2012 and closes on February 25, 2012. The bonds are proposed to be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

There are two options available for investors of which the first option has an annual interest payment while the second one has a cumulative interest payment. Both the options have a coupon rate of 8.70% and tenure of 10 years. The bond carries a lock-in period of five years with a buy-back option at the end of the fifth year. The following table indicates the various options available for investment.

We, at DSIJ, believe that one should invest in the bond and not wait for any last minute tax planning. Our advice to investors is to select the first option to get the best yield at maturity and also select the buy-back option after five years to fetch attractive returns.