The government may soon allow infrastructure special purpose vehicles (SPVs) to raise long-term funds by issuing tax-free bonds to individual households. The scheme is an extension of a plan to allow private infrastructure firms to issue such securities, which was announced by finance minister Prana Mukherjee in March.
As per early indications, the SPVs will be able to approach individual households directly to raise funds for tenure of more than 10 years. The move will lead to four benefits. It will allow each infrastructure project to arrange for its funding, along with enabling the government to meet the target of $1 trillion investment in infrastructure during the twelfth five-year development plan (2012-2017), deepening the thin bond market and increasing the savings rate in the country.
While presenting the general Budget for the present financial year in February, Mukherjee had announced additional tax savings on Rs 20,000 per individual if investment is made in long-term infrastructure bonds certified by the government. This saving was proposed over and above the already available limit of Rs 1,00,000 per assessee.
Since the SPVs will raise funds from individuals, the finance ministry may put in some safeguards in the scheme. ?The infrastructure SPVs will require guarantee from their parent companies having a ?AAA? or ?AA? rating,? a senior government official involved in the exercise told FE.
The government is also considering permitting only those private companies that have invested at least 90% of their capital in infrastructure projects to issue these bonds. Infrastructure NBFCs may also become eligible under the scheme, subject to borrowing limits. However, banks have been kept out of the periphery,?as they almost reached their exposure limits?, the official said.
?A good number of equity investors are likely to invest in these bonds provided they are offered a higher return? the source said, adding that there are more than one crore individual investors in the equity markets.
The construction industry said if the government?s plan fructifies, infrastructure financing will become easier. ?We have been representing with the government on the issue through National Highway Builders Federation since last year. As experienced internationally, the move will facilitate the inflow of bigger funds to infrastructure. The government should also channelise pension and insurance funds,? Soma Enterprise senior vice-president DV Raju said.
IRB Infrastructure Developers chairman and managing director Virendra D Mhaiskar said, ?Allowing SPVs to issue these bonds is a better idea than permitting the parent company. It will ease the flow of funds to each individual project?for which SPVs are normally created. Allowing the parent company to raise funds through this mean may not fulfill the financing requirements of all the projects?.
?Banks in India are not geared for infrastructure financing and there is a a realisation that the growth can get derailed in the absence of adequate funds for the sector. That is why the government is also working on an infrastructure fund. There is also a fundamental need to deepen the thin bond market of the country,? Crisil principal economist D K Joshi said.
However, rating of companies remains an issue that needs detailed discussion, the industry says. ?No doubt there should be safeguards as public money is involved, but AAA or AA rating is too much to ask for as construction companies don?t own the asset in the long term. I think BBB or BB rating should be enough,? Raju said. Mhaiskar said ?people should not go by ratings and should look at the cash flow of the company before investing?.
