In order to get long-term fund for infrastructure projects, the Finance Ministry has permitted seven Central Public Sector bodies to raise issue tax free bonds worth Rs 40,000 crore during the current fiscal. These institutions include National Highway Authority of India (NHAI), NTPC and Power Finance Corporation and four others.

The Income Tax Department issued a notification permitting institutions to issue bonds. Now, issuers can tap the market, once formalities of appointing merchant bankers and filing of prospectus with Registrar of Companies. It is expected that issuance will kick off during second half of the current fiscal. Tax free bond is an instrument where investors do not have to pay tax on interest. Such instrument is normally a long term one and money raised is deployed in infrastructure projects

Reservation for retail investor According to the notification, in a public issue for bonds, 40 per cent will be reserved for Retail Individual Investors (RIIs). Such investor means an individual, head of the Hindu Undivided Family and a Non Resident Indian (NRI) making investment up to Rs 10 lakh. An individual putting more than Rs 10 lakh will be categorised as High Net-worth Individual (HNI) and will not be accounted in RII category.

Bonds can be issued in two ways, public issue and private placement. However, the Ministry has made it clear that at least 70 per cent of aggregate amount of bonds to be issued through public issue. Apart from RII and HNI, bonds can also be offered to Qualified Institutional Investors, corporates, trusts, co-operative banks, regional rural banks besides other legal entities. Bond can be issued in 10, 15 or 20 year tenure. The notification has made it mandatory for each of the investor of such bond to provide Permanent Account Number (PAN).

Interest rate Bond will carry a coupon rate and for which the notification has provided ceiling based on the yields on the Government Securities (G-sec). The issuing company will price the bond by taking an average of the base yield of G-sec for equivalent maturity reported by Fixed Income Money Market and Derivative Association of India. In case of a public issue, the companies will arrive at the price in two weeks ending on a Friday that immediately precede the filing of final prospectus of the bond issue with the Registrar of Companies.

The ceiling coupon rate for AAA-rated bonds shall be 55 basis points less than the reference gilt yield for retail investors and 80 bps lower for other investor segments like qualified institutional buyers, corporates, and high networth individuals. Currently, the benchmark 10-year government bond 7.72%, 2025 is yielding 7.78%. Similarly, the ceiling coupon rate for AA+ bonds shall be 10 basis points (bps) above the ceiling rate for AAA rated entities. In case the bonds are rated AA or AA (-), the ceiling rate shall be 20 bps above the ceiling rate for AAA rated entities.

Related Topics