A special window will be carved out in the tax-free bonds issued by state finance companies, such as IIFCL, PFC, REC and RIFC, for sovereign wealth funds (SWFs) as the government wants to spur inbound capital flows to prop up the weak rupee and contain the current account deficit. Currently, 25% of the bonds are reserved for the private placement route whereas the balance is available to the rest, including retail investors. The idea, according to sources from the finance ministry, is to create a chunk within the 25% for private placement for SWFs.
The government reckons that SWFs from west Asian countries would find India?s tax-free bonds attractive.
In the Union Budget for 2013-14, the government authorised raising up to R50,000 crore through issuance of tax-free bonds. In 2011-12, bonds worth R30,000 crore were issued. In 2012-13, R25,000 crore worth of bonds were to be issued, but the actual amount turned out to be a few thousand crore less.
In these bonds, which are offered by government-backed entities, the interest earned gets tax exemption.
A senior official said, ?The purpose of these bonds is to provide tax exemption for the larger audience and not just a few individual companies. So, SWFs can invest in the private placement of these bonds.? However, the category of investor is not inflexible and can change to accommodate many SWGs.
So far, many sovereign wealth funds from West Asian countries, such as Abu Dhabi Investment Authority, have shown keen interest. ADIA is a sovereign wealth fund owned by the Emirate of Abu Dhabi, and it was founded for investing on behalf of the government of the Emirate of Abu Dhabi.
With a risk- based assessment system put in place for Know Your Customer (KYC) norms, the government has kept sovereign wealth funds under the low-risk category to attract more funds.
Since SWFs do not look for short-term investments, the government is confident they will show interest in these bonds, which are meant to finance infrastructure projects. These bonds usually come for tenures of 10 and 15 years. A few entities also offer 20-year bonds.
Last year, these bonds received a lukewarm response from investors as the finance ministry kept the coupon rate below the prevailing rate on government securities.
In the current financial year, the permission to issue bonds would be given after assessing the cash position by these institutions last year. Companies that were not able to utilise the window last year may not get a second chance while some new entrants could be considered for floating tax-free bonds this year.
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* Currently, 25% of tax-free bonds are reserved for private placement whereas the balance is available to the rest. The idea, say sources, is to create a portion for SWFs within the 25%
* The government reckons that SWFs from west Asian countries would find these tax-free bonds attractive