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IDFC Long Term Infrastructure Bonds
IDFC Long Term Infrastructure Bonds
IDFC Long Term Infrastructure Bonds Public Issue Subscribe for tax benefits September 29, 2010 Overview: In

Public Issue

Subscribe for tax benefits

September 29, 2010

Overview: In Union Budget 2010 -11, Finance Minister Mr. Pranab Mukherjee introduced a new section 80CCF under the Income Tax Act, 1961 that provides income tax deduction of Rs. 20,000 (over and above the Rs. 1 lakh tax benefit available under section 80C, 80CCC, 80CCD & 80CCE) for claiming tax deductions for investments made in the long term infrastructure bonds that are notified by the central government. The tax relief is meant for individual tax payers (except NRIs) as they can save tax maximum of about Rs. 6,000 by investing Rs. 20,000 in infrastructure bonds. Such investments in long-term infrastructure bonds are likely to promote savings and direct resources towards infrastructure development of India.

Tax treatment on infra bonds: These bonds can lower the tax burden of individual taxpayer by Rs. 2,000-6,000 a year, depending on the tax slab. Person in the 10% tax bracket (or Rs. 1.6 to 5 lakh) can save Rs 2,060 (including cess). The one who falls under the 20% tax bracket (or Rs. 5-8 lakh) can save Rs 4,120 and in the highest bracket of 30% (or Rs. 8 lakh and above) saves Rs. 6,180.

It is noteworthy to say that the estimated spending on infrastructure in the 11th Five-Year Plan ending March 2012 is $500 billion (nearly Rs. 25 lakh crore). The target has been doubled for the 12th Plan. These long-term infrastructure bonds will be available for tenure of 10 years and the lock-in period of 5 years. It means investors can not exit from the bonds before 5 years and they have an option to exit in the secondary market or via buyback offer after 5 years. Investors can also pledge the bonds with some specified banks to obtain the loan against the bonds only after completing the lock-in period. Interest rates on these bonds are capped to interest rate on equivalent government bonds.

Earlier, IFCI, the first institution (on the basis of private placement), came up with tax-free infrastructure bond for retail investors that was named “IFCI Tax exemption long term infrastructure bond – Series 1” and raised about Rs. 100 crore, including green-shoe option of Rs. 50 crore. In addition to IFCI, institutions such as LIC, IDFC and NBFCs that are classified as an infrastructure finance company by the RBI are eligible to issue such infrastructure bonds that are eligible for a deduction under section 80CCF.

The issue: The infrastructure major IDFC is set to launch its first tax free infrastructure bond issue to raise Rs. 3,400 crore from retail investors. This is the first public issue in India after the government allowed the tax relaxation for investing up to Rs 20,000 in infrastructure bonds u/s 80CCF. The first tranche of the issue will open as on September 30 and close on October 18, 2010. The issuer will undergo more tranches if it is unable to raise entire amount of Rs 3,400 crore in the first tranche.

Offering: The IDFC Infrastructure bonds have four options such as series 1, 2, 3 and 4 and offer an interest rate of 7.50% and 8.00% annually with cumulative and non cumulative interest rates. The series 1 and 2 are offering 8.00% of returns and having no buyback facility so that they can be redeemed only after 10 years (on maturity). Series 3 and option 4 are the options which yield 7.50% of returns annually and have buyback facility only after 5 years (lock in).

Summary of the issue:

Issuer

 

IDFC Ltd.

Issue Size

Rs 3,400 crore in one or more tranches. There is no minimum issue size.

Rating

“LAAA” (ICRA) indicates stable outlook and is the highest credit quality rating assigned by ICRA.

Security

Fully secured with first pari passu floating charge over secured assets and first fixed pari passu charge over specified immovable properties of the Company.

Bond Face value & issue price

Rs 5,000 per bond.

Minimum Subscription amount

Rs 10,000 or 2 bonds. The bonds can be of the same series or two bonds across different series.

Max Subscription amount

 

No Limit.

 

The Bonds are proposed to provide the following options-

Option 1 - Non-cumulative and no Buyback.

Options for Subscription

Option 2 - Cumulative and no Buyback.

Option 3 - Non-cumulative and Buyback after 5 years.

Option 4 - Cumulative and Buyback after 5 years.

Maturity / Redemption

10 years from the deemed date of allotment.

Lock in period

5

years from the deemed date of allotment.

Buy back for option 3 & 4

5

years + 1 day from the deemed date of allotment.

Listing

 

BSE & NSE.

Mode of payment

ECS, At par cheques & DD

Issuance

Demat form only. Can be rematerialized later on request.

Trading

Demat form only following expiry of the lock in period.

Tax Benefit

Under Section 80CCF of the Income Tax Act the amount, not exceeding Rs. 20,000 per annum, paid or deposited as subscription to long-term infrastructure bonds during the previous year relevant to the assessment year beginning April 01, 2011 shall be deducted in computing the taxable income.

This is over and above the Rs 1,00,000 tax benefit available under section 80C, 80CCC & 80CCD read with section

 

80CCE.

Who can apply

Resident individual or HUF.

Investor should provide

PAN Number and Demat Account No.

Issue opens

September 30, 2010.

Issue Closes

October 18, 2010.

Investment details: The bonds have a face value of Rs. 5,000 and maturity of 10 years. Minimum subscription amount is Rs. 10,000 i.e., investors have to subscribe to a minimum of two bonds. If investors plan to obtain loan against bonds, they have the option to pledge the bonds only after the lock-in period of five years. These bonds will be listed on stock exchanges BSE & NSE and can be traded after five years, though there is no assurance about the liquidity of the bonds on the exchanges after

Redemption: Investors in will be allowed to exit through the secondary market only after completion of the lock-in period of five years from the date of allotment. Investors in series 3 and series 4 can also exit through buyback route (after 5 years).

Available options for investment: Series 1 2 3 4   Non-cumulative and Cumulative and no

Available options for investment:

Series

1

2

3

4

 

Non-cumulative and

Cumulative and no Buyback

   

Type

no Buyback

Non-cumulative and Buyback

Cumulative and Buyback

Face Value

Rs 5000

Rs 5000

Rs 5000

Rs 5000

Minimum number of Bonds per application

Two Bonds and in multiples of one Bond thereafter. For the purpose of fulfilling the requirement of minimum subscription of two Bonds, an Applicant may choose to apply for two Bonds of the same series or two Bonds across different series.

Terms of Payment

 

Full amount with the Application Form

 

Interest payment

Annual

Cumulative

Annual

Cumulative

Interest Rate

8.00% p.a.

8.00% compounded

7.50% p.a.

7.50% compounded annually

annually

Maturity Amount per Bond

Rs. 5,000

Rs. 10,800

Rs. 5,000

Rs. 10,310

Maturity

 

10 years from the Deemed Date of Allotment

 

Yield on Maturity

8.00%

8.00% compounded

7.50%

7.50% compounded annually

annually

Buyback Facility

No

No

Yes

Yes

Yield on Buyback

No

No

7.50%

7.50% compounded annually

Buyback Amount

No

No

Rs. 5,000 per bond

Rs. 7,180 per bond

Buyback Date

No

No

Date falling five years and one day from the deemed date of allotment.

Date falling five years and one day from the deemed date of allotment.

Buyback Intimation Period

No

No

The period beginning not before nine months prior to the buy back date and ending not later than six months prior to the buyback date.

The period beginning not before nine months prior to the buy back date and ending not later than six months prior to the buyback date.

Effective pretax yield for 10% tax slab investor exiting at end of 5 years* Effective pretax yield for 20% tax slab investor exiting at end of 5 years* Effective pretax yield for 30% tax slab investor exiting at end of 5 years* Effective pretax yield for 10% tax slab investor exiting at end of 10 yrs* Effective pretax yield for 20% tax slab investor exiting at end of 10 yrs* Effective pretax yield for 30% tax slab investor exiting at end of 10 yrs*

-

-

10.23%

9.87%

-

-

13.42%

12.58%

-

-

17.20%

15.75%

9.65%

9.19%

9.11%

8.68%

11.58%

10.53%

11.00%

10.01%

13.90%

12.07%

13.25%

11.55%

*Assuming tax rate on interest remains the same over the life of the bond

Credit Rating: ICRA has assigned the LAAA (pronounced L triple A) rating with stable outlook to the issue. ICRA has an outstanding LAAA rating with stable outlook on the various long term bonds programme of IDFC. ICRA has also an A1+ (pronounced A one plus) rating outstanding on the short term debt programme of IDFC. The ratings factor in the strength of IDFC’s sponsor institutions, strong focus on risk management systems, comfortable liquidity position, sound asset quality as on date and strong focus on fee income generating avenues. The ratings also take into account the risks inherent in the infrastructure lending business, the cautious approach of the IDFC management and strong capitalization levels supported by the recent capital infusion provide comfort.

Risks and Concerns: Main risks pertain to infrastructure financing that have project specific and general risks, regulatory changes risks, liquidity risks, risks of NPAs, risk of volatility in interest rates, competition, forex risks, economy slowdown risks, economic policy risks.

About the company: IDFC has been sponsored by the Government of India as a key institution to facilitate infrastructure development in the country. The focus areas for IDFC continue to be the Energy, Telecom, Industrial & Commercial Transportation sectors, although the company is also targeting the Healthcare, Education and urban Infrastructure sectors. IDFC also works with state and national level entities to formulate policies aimed at expediting infrastructure development in the country. Recently, IDFC has been classified as an infrastructure NBFC. IDFC has an asset base of Rs. 33,641 crore as on March 31, 2010. During Q1FY11, IDFC reported a consolidated net profit after tax of Rs. 334.51 crore on a total income of Rs. 1097.23 as compared with the net profit of Rs. 274.48 crore on total income of Rs. 994.61 crore in Q1FY10 respectively. Asset quality remained comfortable with Gross and Net NPA of 0.27% and 0.15% respectively as on June 30, 2010.

Conclusion: Though the returns from infrastructure bonds are relatively low compared to other investment options, they offer attractive interest rate based on the net investments (considering the tax advantage). ‘Series 3’ seems to be more attractive for all type of tax paying investors. However for investors wanting to lock in their investments for 10 years, series 1 is also a good option. The allotment is on first come first serve basis. Hence investors will have to take a call and act soon enough.

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