The lukewarm retail response to the bonds issued by the Infrastructure Development Financial Company (IDFC) indicates that retail investors are just not lapping up the infrastructure growth story. While IDFC managed to collect only Rs 436 cr, falling way short of its target of raising Rs 3,400 cr, L&T Infrastructure Finance, which floated similar bonds on October 15 to raise Rs 700 cr, has now decided to extend its issue closing date from November 2 to November 15. In sharp contrast, the plain vanilla SBI bond, which did not have any tax incentive but offered an interest rate of 9.25% for its 10-year bonds, was oversubscribed 10 times by retail investors and the issue was closed in two days flat. IDFC has now said it will come back to the market for additional tranches of long-term bond issue before March 31?as a new provision for tax-saving investments in the Union Budget 2010-11 under section 80CCF of the IT Act allows for a deduction of Rs 20,000 for investments made in notified long-term infrastructure bonds. This deduction is in addition to Rs 1 lakh available under section 80C of the IT Act for investments such as life insurance premium, provident fund, PPF and National Saving Certificates. One could possibly blame the timing for the tepid response, as retail investors and the salaried look at tax saving insurance schemes and savings instruments beginning December to March. Moreover, some big initial public floats like CIL and the runaway success of SBI?s bond mopped up liquidity from the markets.
The difference in interest rates between SBI?s bond and the two infrastructure bonds (7.5-7.75%) was significant enough not to be missed by retail investors. It has now set a benchmark for similar bonds in the future that would have to match it to attract investors. Both the bonds were for a long tenure of 10 years and a lock-in of 5 years. So, without a convenient secondary market this means a lock-in of 10 years, and since there is no implicit government backing, investors didn?t show much interest. Though an investor can save tax ranging from Rs 2,000 to Rs 6,000, the dampener is that the income received in the form of interest is taxable. In a rising interest rate regime, LIC and Rural Electrification Corporation, which are also planning to come out with infrastructure bonds, will have to keep these aspects in mind.