More Tax Free Bonds To Hit The Markets Next Fiscal

The government, in the Union Budget 2013, announced that the private infrastructure funds can raise money by issuing tax free bonds with the government's approval. For the next fiscal, the government has set a target of Rs 50000 crore. As the companies have already raised money this year, one would see new issues hitting the capital markets only by the second half of FY14.

On an average, the tax free bonds have a maturity period of more than 10 years and have a coupon rate of about 7.5%, which varies from issue to issue. Primarily, investors enter such bonds with a purpose of protection of capital as also for a better yield on their investments. Tax free bonds are usually positive for both the issuer as well as an investor. The issuers get a capital for a long term at a decent rate while investors get an attractive rate (considering the tax free nature of the bonds).

For this fiscal year, the government has announced tax free bonds of Rs 60000 crore while for FY12 it had announced tax free bonds of Rs 30000 crore. While FY12 saw a strong response to these bonds, FY13 has seen a tepid response to them. We, however, may get to see more issues of tax free bonds next fiscal giving more options for investors to invest in.

This fiscal so far, tax free bonds have been issued by IIFCL, PFC, NHB, IRFC, HUDCO, REC, JNPT, Ennore Port and Dredging Corporation of India. The coupon rates on these bonds have remained between 7%-7.6%. With the interest rates expected to come down next year, the coupon rates are also likely to fall.

The Twelfth plan has earmarked Rs 55000 crore of investment in the infrastructure sector which requires a huge private participation. This would not come without funds and that’s exactly why the government has allowed private firms to issue tax free bonds. This will also help the country to increase its growth rate. Besides, as equity markets remained volatile, the IPO volumes have also come down significantly and these tax free bonds will help companies to raise funds for their projects.

The move will benefit private companies like L&T and SREI Infra. The funds raised by the firms earlier are yet to be deployed as many infra projects are yet to take off. The best example is NHAI, which is still to deploy Rs 10000 crore raised through tax free bonds issued in FY12. NHAI is not planning any issue till FY15, indicating that infra spending has taken a beating despite having a surplus budget for the same.

Due to private participation, investors will have to be extra cautious and will have to consider the track record of the company in servicing debts. A higher coupon rate from these companies may not necessarily mean a good issue and safety of capital.