Tax-free bonds may go beyond IRFC

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Mumbai: Signals from the Railway Budget indicate that the finance ministry is likely to bring back tax-exempt bonds in a big way to finance infrastructure growth and bridge the gap between a high savings rate and low infrastructure finance.

In the Railway Budget, minister Mamta Banerjee said, “Finance ministry has approved issue of tax-free bonds by Indian Railway Finance Corp (IRFC), for the first time, after a gap of several years.”

In July 2004, the finance ministry had discontinued the issuances of tax-exempt bonds by public sector companies, except for the Power Finance Corporation and Rural Electrification Corporation.

However, in December 2008, faced with the challenge of stepping up growth in a slowing down economy, the government had allowed India Infrastructure Finance Company Ltd (IIFCL) to raise Rs 10,000 crore in FY09. Under the offering, the bonds had a 6.85% interest rate payable annually and a term of five years. And, the company had easily raised funds through the bonds by March 17. Subsequently, in May this year, the government also allowed the National Highways Authority of India to raise up to Rs 4,000 crore through tax-free bonds in the current fiscal.

The recent financial panel on liquidity, constituted in October 2008, headed by the then finance secretary Arun Ramanathan and including members from industry and mutual funds, has also recommended bringing back tax-exempt bonds. The panel argued that the low cost of funds and the savings opportunity yielded more benefits than costs.