IRFC Tax Free Bonds

Indian Railway Finance Corporation (IRFC) has come up with secured, tax free, redeemable, non-convertible bonds worth a face value of Rs 1000 each. IRFC will issue two series of bonds aggregating Rs 1000 crore with an option to retain over subscription up to a shelf limit of Rs 8886.40 crore. With this issue, IRFC expects to finance acquisition of wagons, locomotives and coaches which it will then lease to the Ministry of Railways (MoR).

The Issue

The issue has come in two series - I and II - of 10 and 15 years tenures respectively. For both the series, IRFC has declared different coupon rates for different categories of investors. For the first three categories representing QIB, corporate portion and high networth individuals, the coupon rate is 7.18% in series I and 7.34% in series II. These three categories also have a reservation of 20% each in this issue. For the category IV, meant for retail investors, 40% of the issue is reserved. The coupon rate for the retail investors in series I is 7.68% and in series II it is 7.84%. The interest will be paid annually.

The minimum application size is fixed at five bonds (Rs 5000) and can be accepted in multiples of one after applications. Since these are secured bonds, the claims by the bond-holders in this issue will be superior to the claims of any unsecured creditors. The issue has attracted AAA credit rating from all the three leading credit rating agencies (CRISIL, ICRA and CARE), which indicate highest safety and timely servicing of the capital. Lead managers of the issue are SBI Capital Markets, A.K. Capital Services, Inam Securities, ICICI Securities and Kotak Mahindra Capital.

About IRFC

Incorporated in 1986, IRFC, a financing arm of the Ministry of Railways raises money to part-finance the expansion plans of the Indian Railways. IRFC has been consistent in its profitability. Its long term loans and advances have grown at a four year compounded annual growth rate (CAGR) of 20.94% by March 2012. For the fiscal FY12, the company reported a 21% growth in its total income to Rs 4643 crore. Net profit however was flat at Rs 480 crore.

Conclusion

The issue has already opened on Monday, Jan 21, 2013 and will remain open till Jan 29, 2013. On the first day, the issue has been subscribed by 0.8x with over subscription in QIB and Corporate Portion. Only those investors with a long term horizon should subscribe to this issue. Though the issue will be listed on NSE, trading volume would be low and hence it would be difficult to exit. The issue is more attractive for the investors with higher tax brackets. The effective yield for the tax bracket of 30.90% and 20.60% is higher than rates offered by fixed deposits in banks and hence they can subscribe to the issue.

However, investors falling in the smaller tax brackets (10.3%) would get better interest rates in fixed deposits offered by banks hence they may skip this issue unless they are looking for the long term investment horizon. Being a public sector entity the risk associated with the issue is negligible.