IFCI INFRASTRUCTURE BONDS

Industrial Finance Corporation of India (IFCI) is the first company to issue tax saving infra
bonds. Minister in Union Budget had introduced a new section 80CCF under the Income Tax
Act, 1961 that provide income tax deduction of Rs. 20,000 in addition to Rs 1 Lakh available
under other provisions for claiming tax deductions for investments made in the Long Term
Infrastructure Bonds that are notified by the central government.

IFCI is one of the few institutions, which have been mandated by the central government to
issue such bonds. IFCI has come up with infra bonds that have face value of Rs 5,000 and
a10-year tenure (Exhibit-1).

Besides Life Insurance Corporation of India (LIC), Infrastructure Development Finance

Company (IDFC) and Industrial Finance Corporation of India (IFCI), such bonds can be
issued by an NBFC that gets classified as an infrastructure finance company by banking
regulator RBI.

CREDIT RATING

The government has decided to exempt them from getting the credit ratings -- which are
mandatory for all the other kinds of bond issuances.

In any bond issuance exercise, the issuer has to generally get the bond rated by two different
credit rating agencies, so that the investors get an idea about the risk profile of the bond.

However, no such condition is being put on the tax-free infrastructure bonds to be issued by
the selected NBFCs under this programme. The approval process for such issuers is itself
very stringent and only highly-rated NBFCs are being granted the licences. Therefore, it was
not necessary to get the bonds also rated by the credit rating agencies.
However the approval process would make sure that only highly-rated institutions get
classified by RBI and the issue could be revisited again if it is felt that a credit rating needed
to be mandatory for bonds issued by certain entities.
BENEFITS TO DIFFERENT SECTIONS OF PEOPLE

These bonds can lower your tax burden by Rs 2,000-6,000 a year, depending on the tax slab.
A person in the lowest tax bracket, who pays 10 per cent income tax (Rs 1.6-5 lakh), can
save Rs 2,060. The one in the 20 per cent tax bracket (Rs 5-8 lakh) can save Rs 4,000 and in
the highest bracket, of 30 per cent (or Rs 8 lakh and above), saves Rs 6,180.

Taxpayers in the 10 per cent and 20 per cent bracket can wait for future issues. This is
because, even if the future issues have slightly lower interest rates, it will not impact the
returns greatly but investors in the 30 per cent tax bracket can look at this issue, as this is
competitively priced.

EXIT OPTION

However, the gains from this investment will attract long-term capital gains tax. The person
will have an option to either pay a flat 10 per cent tax or 20 per cent with indexation benefits.
IFCI has priced these bonds depending on the exit option – if you’re willing to stick to your
investments for the entire tenure, you get higher returns.

If you want to sell the bonds back to IFCI after the lock-in period, the interest rate will be
7.85 per cent each year. Within this, a person can ask for either cumulative interest (interest
paid on maturity) or opt for annual interest payout.

For those willing to keep the capital locked for the entire tenure, the company is rewarding
such investors with a 10-basis point higher interest rate, that is, 7.95 per cent. Here, too, a
person has an option of receiving annual interest.

IFCI would list this bond on the Bombay Stock Exchange. This means a person who has
opted for a higher interest rate bond can still exit, provided there is demand for these papers
on the exchange.
FUTURE PROSPECTS

These bonds are getting high attention from policymakers as the investors have been given a
tax benefit of Rs 20,000 a year for investing in them to help garner funds for the
infrastructure sector.

License for issuing such bonds are given to only highly specialized firm which itself will
prove the creditability of Bond

The Planning Commission has made an investment outlay of one trillion dollar on
infrastructure in the 12th five-year Plan period, starting 2012, up from a targeted 500 million
dollar for the 11th plan period.

But on a contrary, as future interest rate will depend on economic growth. If there is high
interest offered by other sources, then ICFI wont be that lucrative. As the case it is not
attracting many individuals from 10% and 20% bracket.
EXHIBIT-1

IFCI Tax Exemption Long Term Infrastructure Bonds

Issuer IFCI Limited
Offering 1,00,000 Unsecured, Redeemable, Non-Convertible, Taxable Bonds of Rs. 5,000/-
each aggregating to Rs. 50 Crore with a green-shoe option to retain over-subscription for
issuance of additional Infrastructure Bonds
Type Private Placement basis
Instrument Unsecured, Redeemable, Non-Convertible, Taxable Bonds having benefits
under section 80 CCF of the Income Tax, 1961 for long term Infrastructure Bonds
Rating BWR AA- by BRICKWORK RATINGS INDIA PVT LIMITED
Eligible Investors Resident Indian Individual (Major) and HUF through Karta of the HUF
Security Unsecured
Face Value Rs. 5,000/- per bond
Issue Price At par (Rs. 5,000/- per bond)
Minimum Subscription 1 Bond and in multiples of 1 Bond thereafter,
Tenure 10 years, with or without buyback option after five years
Options for Subscription
The Bonds are proposed to provide the following options-
• Option I – Non-cumulative and Buyback after 5 years
• Option II – Cumulative and Buyback after 5 years
• Option III – Non-cumulative and no Buyback
• Option IV – Cumulative and no Buyback
Redemption / Maturity
At par at the end of 10th year from the deemed date of allotment. For Cumulative Option, at
par with cumulated interest thereon.
Coupon rate
• Option I & II- 7.85% p.a.
• Option III & IV – 7.95% p.a.
In case of cumulative bonds, interest shall be compounded annually
Listing Proposed to be listed on BSE
Trustee Axis Trustee Services Limited
Depository National Securities Depository Ltd. and Central Depository Services (India) Ltd.
Registrars Beetal Financial & Computer Services (P) Ltd.
Mode of Payment
Interest payment will be made through ECS/At Par Cheques/Demand Drafts
Issuance Demat form only
Trading Demat mode only

Terms and Condition:

 The interest received on these bonds shall be treated as income from any other source
and shall form part of the total income of the assessed in that financial year in which
they are received.
 Only Resident Indian Individuals (Major) and HUF can invest in these bonds.
 The interest received in these bonds are not tax free. The investor is liable to pay tax
on the interest received.
 No TDS shall be deducted on the interest received as these bonds are issued
compulsorily in Demat mode and shall be listed on Bombay Stock Exchange.
 The bonds shall be compulsorily issued in Demat mode, so investors without demat
shall not be eligible.
 Application can be made in joint names with a maximum of three applicants,
however the demat account shall also be held in the joint names and order of
applicant shall be the same as appearing in the demat account.