IIFCL 8.75% Tax-Free Bonds – October 2013 Tranche-I Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

After REC 8.71% issue and HUDCO 8.76% issue, India Infrastructure Finance Company Limited (IIFCL) would be the third such company to come up with its public issue of tax free bonds this financial year from the coming Thursday i.e. October 3rd.

IIFCL has fixed its coupon rates at 8.75% per annum for 20 years, 8.63% per annum for 15 years and 8.26% per annum for 10 years. As compared to the HUDCO issue, the rates are lower for the 10 year and 15 year options, but higher for the 20 year option. This is probably due to a rise in the longer duration rates in the last 10-odd days, after the Repo Rate hike by the RBI.

The issue has been rated ‘AAA’ as against the currently running ‘AA+’ rated issue of HUDCO. So, I think the investors, who were not subscribing to the HUDCO issue due to its lower rating of ‘AA+’, should definitely lap it up to enjoy higher tax free rate of interest.

The official closing date of the issue is October 31, but the company may extend it or preclose it, depending on the investors’ response to the issue.

Size of the Issue – IIFCL is allowed to raise Rs. 10,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 2,963.20 crore through three of its private placements. The company plans to raise Rs. 2,500 crore from this issue, including the green-shoe option of Rs. 2,000 crore, and that is why the company is calling it to be “Tranche-I Issue”.

The issue size is smaller in comparison to the issue size of REC bonds of Rs. 3,500 crore and also of HUDCO bonds of Rs. 4,809.20 crore. I was expecting IIFCL to raise Rs. 7,000 crore from this issue itself, but probably the company sees lesser investor appetite at this point in time, as the market is already flooded with other bond or NCD issues.

NRIs not allowed – This was quite surprising to me. Contrary to what was appearing in the newspapers a few days back to attract foreign investors or non-resident Indians (NRIs) to invest in some kind of infra bonds issued by IIFCL, the company has not allowed them to invest in this Tranche-I issue at least. Probably they have their own reasons behind it.

Listing – IIFCL will get these bonds listed only on the Bombay Stock Exchange (BSE). Investors can apply for these bonds either in demat form or in physical form, as per their comfort and requirement. The company will get the bonds allotted and listed within 12 working days from the issue closing date.

Interest on Application Money & Refund – IIFCL will pay interest to the successful allottees on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment, at the applicable coupon rates. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Rating of the issue – Four companies have rated this issue, ICRA, Brickwork Ratings, CARE and India Ratings, and all of them have rated this issue at ‘AAA’, which is their highest rating to any debt issue. Also, these bonds are ‘Secured’ in nature against certain assets of the company.

Categories of Investors & Allocation Ratio – The investors again have been classified in the following four categories and each category will have certain percentage of the issue reserved for the allotment:

  • Category I – Qualified Institutional Bidders (QIBs) – 15% of the issue is reserved
  • Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved
  • Category III – High Networth Individuals (HNIs) including HUFs – 25% of the issue is reserved
  • Category IV – Resident Indian Individuals (RIIs) including HUFs – 40% of the issue is reserved

Minimum & Maximum Investment – There is no change in the minimum investment requirement of Rs. 5,000 i.e. at least 5 bonds of Rs. 1,000 face value each. Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.

Profile of the company – IIFCL, which started its operations in 2006, is 100% owned by the Government of India. IIFCL has been a key institution in the infrastructure financing space and serves the strategic role in financing economically viable infrastructure projects in the country.

IIFCL is a favoured institution with the Government of India. Its board of directors includes representatives from the Ministry of Finance and the Planning Commission. Also, India Infrastructure Finance Company UK (IIFC-UK), IIFCL’s wholly-owned subsidiary, has a government-guaranteed $5 billion credit line from the Reserve Bank of India (RBI) against India’s foreign exchange reserves.

The government has supported IIFCL by way of regular equity infusions and this figure stood at Rs. 400 crore last financial year. IIFCL has total borrowings of Rs. 29,493 crore as on March 31, 2013, out of which 72% borrowings carry sovereign guarantee by the government.

With the interest rates still ruling higher, IIFCL’s interest rates look quite attractive to me. IIFCL is a special company in the infrastructure finance space and I think the support extended to it by the government will continue in the near future as well. With so many positives, I think this issue definitely merits some consideration by the investors.

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