With the benchmark bond yields expected to soften further on rate cut hopes, the coupon rates on the proposed tax-free infrastructure bonds may not be as attractive as buyers want. The 10-year government bond yield is hovering around the 7.73% levels at present and should policy rates fall, the yields on the gilt will drop further. Some bond market experts expect the issuance limit for tax-free infra bonds to be in the range of R50,000 crore to R70,000 crore. In FY14, the limit was set at R50,000 crore, of which companies issued bonds worth R49,200 crore. However, there was no announcement of tax-free bonds last fiscal.
State-owned entities like the Indian Railway Finance Corporation (IRFC), which is the financing arm of railways, and National Highways Authority of India (NHAI) are the major companies likely to benefit from the tax-free infra bonds.
“The benchmark government yield is expected to soften further and so coupon rates on infra bonds may be lower than earlier expected,” said Ashish Jalan, assistant vice-president, fixed income at SPA Securities.
Bond market arrangers say rates on the tax-free bonds could be about 150-200 basis points compared with those in FY14, when the last time tax-free infra bonds were issued.
In FY12, IRFC had borrowed R7,000 crore through these tax-free infra bonds. IRFC had issued bonds for a tenure of 10-year at a coupon rate of 8.00% and 15-year bonds at a coupon rate of 8.10%. In the same fiscal, NHAI raised R10,000 crore by issuing 10-year bonds at a coupon rate of 8.20% and 15-year bonds at 8.30%.
In FY13, NHAI didn’t raise any funds through tax-free bonds while IRFC went on to raise R6,900 crore. The yields on the 10-year and 15-year bonds came down to 7.18% and 7.34%, respectively.
In FY14, NHAI hit the market again to raise R5,000 crore through the tax-free bonds that saw an increase in coupon rates to 8.27% and 8.50% for 10-year and 15-year bonds, respectively. IRFC also raised R9,000 crore at coupon rates ranging from 8.19% to 8.63% in two tranches.
From the bond markets, public sector units (PSUs) in the roads and railways sector are together slated to borrow R80,300 crore in 2015-16 compared with R20,800 crore last year, according to a Crisil research report.
This is supported by the fact that the government will be prioritising the completion of one lakh kilometres of additional roads according to the budget.
“The budget allows for a large part of this borrowing to be in the form of tax-free bonds,” the Crisil report said.