Infra bonds flop, doubts arise over financing of 12th Plan

Tax-saving infrastructure bonds issued by non-banking finance companies (NBFCs) have received paltry subscriptions, indicating investors? lack of interest in these long-term debt instruments. This might force the companies to look at other instruments for raising funds to meet their lending targets in the coming fiscal.

The poor response to infrastructure bonds is apparently because of the lack of a well-developed domestic bond market, which constrains the liquidity of such debt instruments, making them unattractive to potential investors.

The low tax savings from these investment instruments is also a turn-off to investors. For example, a salaried employee in the 10% income-tax bracket would make a saving of only R2,000 on investing R20,000 in infrastructure bonds. Besides, interest income is taxable, which means the actual return from these bonds would be lower than the corresponding coupon rate.

The failure of these 10-year infrastructure bonds also raises serious questions about the country?s ability to finance expenditure of over $1 trillion in the infrastructure sector envisaged for the 12th Five-year Plan.

The facility of infrastructure bond, which was introduced by the finance minister in the 2010-11 Budget as a one-year window for NBFCs with infrastructure finance company status (IFC) to raise cheaper funds, provides for an additional tax deduction limit of R20,000 per employee over the R1-lakh ceiling. NBFCs with IFC status can issue infrastructure bonds to the extent of 25% of their previous year?s disbursements. Mukherjee has extended this opportunity for one more year in Budget 2011-12.

However, infrastructure bonds issued by most NBFCs this fiscal have met with a lukewarm response from investors, putting a dampener on companies plans to raise funds through this route in the coming fiscal.

For example, Power Finance Corporation?s collections from its R5,300-crore infrastructure bond issue was just R250 crore. This despite the fact that PFC had gone through the public placement route, which provides for an opportunity to undertake publicity campaigns to sell the issue, unlike private placement.

Rural Electrification Corporation, which is eligible to raise up to R4,000 crore through infrastructure bonds, expects to mobilise just R100 crore through these instruments. Its bond issue closes on Tuesday. The company had received subscription requests of R80 crore as on March 26.

Anticipating the lack of appetite for these bonds, REC has opted for private placement rather than go for a public issue, which requires higher marketing costs, according to a senior official in the company.

India Infrastructure Finance Company, which went for a public issue, was able to raise just R186 crore from infrastructure bonds against its eligibility for R1,200 crore. And PTC India Financial Services? R100-crore infrastructure bond issue has mopped up just R37.3 crore.

Infrastructure Development Finance Company (IDFC) has raised R1,400 crore by issuing similar bonds against its eligibility of R3,400 crore. IDFC has done somewhat better mainly because it issued its infrastructure bonds in three tranches unlike other companies, which tried to sell the entire issue in one go.