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Lukewarm response to infrastructure bond issues could scuttle plans

India’s often-repeated plan to invest a trillion dollars in infrastructure may just remain on paper with investors turning their back on infra bonds.

, ET Bureau|
Updated: Mar 21, 2011, 06.12 AM IST
MUMBAI: India’s often-repeated plan to invest a trillion dollars in infrastructure may just remain on paper with investors turning their back on bonds sold to fund the building of roads, ports and power utilities. Bonds sold by lenders such as Infrastructure Development Finance Corp (IDFC), Power Finance Corp (PFC) and Rural Electrification Corp (REC) struggled to meet even half their target as poor tax structure and low yields failed to lure investors.

Investor appetite is unlikely to improve in the next few quarters at least with interest rates rising faster and poised to continue for some time as the central bank fights inflation. “Investors don’t get attracted to these bonds primarily because of low interest rates,” says Abhinav Angirish, MD of At an average of 8.25%, these bonds yield at least 150 basis points lower than what a bank deposit fetches at 9.5-9 .75%.

“These bonds don’t look attractive. The maximum tax benefit would be . 6,180 if you are in the highest tax bracket of 30.9%. Secondly, the period of investment of five years and above is also disappointing,” Angirish says. IDFC and its ilk have raised Rs 5,600 crore this year from retail investors, less than half of what it cost to build an airport in New Delhi.

These companies have extended their deadline and tried to sell them in many tranches, but investors just don’t buy. In contrast, SBI’s 9.75% bonds were sold like hot cakes without any of the marketing and promotion that infrastructure lenders do. It raised more than Rs 8,000 crore in less than a week. “It’s a back-breaking task to make people invest. 20,000 for these longterm bonds, when they are looking at higher returns on other instruments with similar tenors,” says a chief executive of an investment bank, who did not want to be identified.

It is not that infrastructure-funding companies did not want to offer high rates, but rules designed to provide tax benefits on these bonds are a major deterrent. These rates are linked to the 10-year government bond yields, which do not move in line with top-rated corporate bonds, at least in the recent past. Finance minister Pranab Mukherjee, in the recent Budget, did not help their cause either.

Tax benefits on these bonds with a cap of Rs 20,000 investments were extended by a year when the market was expecting an increase in the limit to as high as Rs 1 lakh. Even the current tax concessions are not enough for investors to get attracted.

“In terms of returns, the returns on interest are taxable. So when you are offering, say 8.25%, post tax, it would come to about 5.6-6 % for the 30% tax bracket, making the posttax returns unattractive. Investors have rather seen better returns in investing in equity-linked savings schemes in the recent years,” said Anil Rego, CEO of Right Horizons, a Bangalore-based wealth management firm. The minimum tax exemption limit has been raised for the general category, from . 1.6 lakh to . 1.8 lakh for 2011-12.
“After the increase in the tax exemption limit, people may just prefer to pay taxes, instead of investing in these bonds,” says Mr Rego. Interestingly , the bulk of the tax payers are in the first two tax slabs. But infrastructure companies are not giving up hopes yet.

“I agree the limit on investment is too small, but it is still a very attractive option to invest for the salaried class who can save almost Rs 6,000,” said SK Goel, chairman and MD at the state-run India Infrastructure Finance Co. “We have asked the government to make the interest income tax free for the investors. Next time, the government comes out with a notification, these proposals could be considered,” he added.

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