FM ups allocation for investment in tax-free infra bonds

Written by fe Bureau | Updated: Mar 1 2011, 06:50am hrs
In a major move towards attracting large investments into the infrastructure sector, finance minister Pranab Mukherjee has increased the Budget expenditure for the sector for 2011-12 by 23% to Rs 2.14 lakh crore, while allowing issuances of tax-free bonds worth Rs 30,000 crore. Moreover, in order to ensure adequate response from retail investors for these bonds, he has proposed extending the income tax exemption of up to Rs 20,000 for one more year. These measures, along with the proposed hike in the FII investment limit in corporate bonds by an additional $20 billion, are expected to attract huge investments into the fund-starved infrastructure sector.

"There are a lot of mega highway and port sector projects that are coming up for bidding, which require huge investments. The proposed measures will definitely help the developers in achieving financial closures, attracting both overseas as well as domestic investors, said Samir Kanabar, directorinfrastructure, Ernst & Young. He added that since the proposed measures are in the nature of debt, the infrastructure developers will also be able to get funding at a relatively competitive rate as compared to bank financing.

Mukherjee said the Indian Railways Finance Corporation (IRFC) and the National Highways Authority of India Limited (NHAI) will issue tax-free bonds of Rs 10,000 crore each, while tax-free bonds worth Rs 5,000 crore each will be issued by Hudco and the port sector, respectively.

Already listed companies like IDFC, REC, PFC, L&T and IIFCL have planned to mobilise close to Rs 12,000 crore through issue of infrastructure bonds. Out of them, IDFC has already raised Rs 1,228 crore in two tranches and expects to collect another Rs 2,172 crore. Normally such bonds receive a good amount of interest from investors because of the tax advantage, said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities.

Given the dearth of funds for the sector, Ranen Banerjee, executive director infrastructure development, PwC, said the proposed issue of tax-free bonds would help meet the sector's requirement for a year. Project delays and cost escalation had in the past led to lower capacity addition than targeted in power, roads highways and railways.

The finance minister also said the government has kept a target for spending Rs 2.14 lakh crore in the infrastructure sector, accounting to about 48.5% of the gross budgetary support for the total Plan expenditure. To attract foreign funds for infrastructure financing, I propose to create special vehicles in the form of notified infrastructure debt funds, he said. Since most infrastructure companies are organised in the form of SPVs, Mukherjee has permitted FIIs to invest in unlisted bonds with a minimum lock-in period of three years.