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Useful articles for your finance management by our team of experts

Invest In IIFCL Tax Free Bonds – Tranche I

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bondsIn Aug and Sep, 2013 we had public issue of tax free bonds from state-owned Rural Electrification Corporation (REC) and Housing and Urban Development Corporation (HUDCO) respectively. Now, from 3rd Oct, 2013 we have subscription open for third state-owned company India Infrastructure Finance Company Ltd (IIFCL) which also offer tax free bonds to investors and offering high yield returns in long term by investment in this secured debt instruments.

Features of the issue

Issue SizeRs 500 crore
Retain of oversubscription up toRs 2,500 crore
Issue opens on3rd Oct, 2013
Issue closes on31st Oct,2013
Minimum ApplicationRs 5,000 (5 bonds)
Maximum ApplicationRs 10 lakhs (retail investors)
Face ValueRs 1,000
Coupon dateDate of allotment
ListingBonds will be listed on BSE
Allotment criteriaFirst come first serve basis
Credit RatingsCARE, ICRA and Brickwork has given AAA rating which is highest rating to any debt instruments and indicates financials of the company are stable.

Source: Company prospectus

Objective of the issue

The funds raised by IIFCL through this issue will be utilised towards lending in the infrastructure sector and increasing the resource base of the company.

Categories of investors and allocation ratio

Category – I

Category – II

Category – III

Category – IV

Qualified Institutional Bidders (QIBs)Public financial institutions, scheduled commercial banks, mutual funds, provident funds, pension funds, insurance companies, etc.Non-Institutional Investors (NIIs)Companies, limited liability partnerships, cooperative banks, regional rural banks, etc. High Net-Worth Individuals (HNIs)Investors applying for an amount aggregating above Rs. 10 lakhs across all series of bonds in each Tranche – I issue. This category includes HUFs.Resident Indian Individuals (RIIs) Investors applying for an amount aggregating upto and including Rs. 10 lakhs across all series of bonds in each Tranche –I issue. This category includes HUFs.
Allocation is 15% of overall issue sizeAllocation is 20% of overall issue sizeAllocation is 25% of overall issue sizeAllocation is 40% of overall issue size

*Note: Non-resident Indians (NRIs) are not allowed to invest in tranche-I issue of IIFCL.

Source: Company prospectus

Specific terms for each series of bonds

ParticularsIIFCL – Series IIIFCL – Series IIIIFCL – Series III
Tenors of bond

10 years

15 years

20 years

Frequency of interest/coupon payment

Annual

Annual

Annual

Coupon rate (%) p.a. for Category IV (Retail investors)

8.26%

8.63%

8.75%

Coupon rate (%) p.a. for Category I, II and III (QIBs, NIIIs and HNIs)

8.01%

8.38%

8.50%

Effective Taxable Yield (30% tax bracket)

11.95%

12.49%

12.66%

Effective Taxable Yield (20% tax bracket)

10.40%

10.87%

11.02%

Effective Taxable Yield (10% tax bracket)

9.21%

9.62%

9.75%

Source: Company prospectus

Company Profile

IIFCL was incorporated in Jan, 2006 as a wholly owned Government of India company and commenced its operations from Apr, 2006 to provide long term finance to viable infrastructure projects through the Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle called India Infrastructure Finance Company Ltd (IIFCL), broadly referred to as SIFTI. The company provides long term financial support to infrastructure projects in various sectors such as transportation, energy, water, sanitation, communication, social and commercial infrastructure through direct lending, subordinate debt and credit enhancement. Composition of board committee has members from varied background with opulent experiences such as Mr Rajiv Takru from Ministry of Finance, Mr Ravi Mittal from Planning Commission of India, Mrs Sharmila Chavaly from Department of Economic Affairs, etc.

The company has 3 wholly owned subsidiaries as follows:

  • IIFC (UK) Ltd which borrows foreign currency loans upto USD 5 billion in tranches from Resreve Bank of India to finance infra projects in India and to provide financial assistance in import of capital goods,
  • IIFC Projects Ltd to provide advisory services, and
  • IIFCL’s Infrastructure Debt Fund to finance infrastructure projects in India from investors by raising funds through mutual fund route.

Financial snapshot of the company

Particulars

FY10

FY11

FY12

FY13

Cumulative till FY13

No. of projects assisted

32

37

53

70

299

Amount Sanctioned (Rs in Crore)

5,616

7,402

8,595

11,514

51,887

Source: Company reports

  • As on FY13, IIFCL has sanctioned cumulative loans under direct lending for Rs 51,887 crore in 299 projects which implies CAGR of ~27% in last three years for gross sanction of amount lending.

Key Financials

 Particulars

FY10

FY11

FY12

FY13

PAT (Rs Cr)

154

296

586

1,047

Net worth (Rs Cr)

2,086

2,582

3,668

4,858

Source: Annual reports

  • PAT has grown substantially i.e. at CAGR of 89.5% between FY10-13.
  • Net worth of the company has also grown at CAGR of 20.7% between FY10-13.

Other Key Financials

(Rs in Crore)                                                                                               

Particulars

FY12

FY13

Interest earned

2,526

3,249

Interest expense

1,524

1,768

Net interest earned

1,002

1,481

Gross Non-performing asset (NPA) (%)

-

0.98%

Net NPA (%)

-

0.88%

Source: Annual report

  • Gross NPA of the company was Rs 236 crore i.e. 0.98% in FY13.
  • Net interest earned grew ~48% in FY13 while compare to previous year.

Risk factors

  • Changes in interest rates and downgrading in credit rating of the company can affect trading price of bonds
  • There is limited trading in the bonds so it may not be available on sustained basis in the future
  • Downgrading of India’s sovereign rating by a credit rating agencies can have a negative impact on business, financial profile and operations
  • Political instability or changes in policies can affect economic conditions / infrastructure sector in India and impacts IIFCLs business

Tax benefits

  • Interest earned on these bonds is fully exempt from income tax
  • No deduction of tax at source from the interest which is accrued to bondholders
  • Wealth tax is not levied on investment in bond as per wealth tax act, 1957

Comparison Table and Conclusion

Let’s compare IIFCL with HUDCO and REC Tax Free Bonds

Particulars

IIFCL Tax Free Bonds

HUDCO Tax Free Bonds

REC Tax Free Bonds

Issue Size (Rs Cr)

2,500

3,500

4,810

Tenors

10, 15 and 20 years

10, 15 and 20 years

10, 15 and 20 years

Frequency of interest/coupon payment

Annual

Annual

Annual

Credit Rating

CRISIL AAA, ICRA AAA, Brickwork AAA

CARE AA, IND AA+

CRISIL AAA, ICRA AAA

Minimum investment

Rs 5,000

Rs 5,000

Rs 5,000

Coupon rate (%) p.a. for Category IV (Retail investors)

8.26% – 8.75%

8.39% – 8.76%

8.26% – 8.71%

Effective Taxable Yield (30% tax bracket)

11.95% – 12.66%

12.14% – 12.65%

11.95% – 12.6%

Effective Taxable Yield (20% tax bracket)

10.4% – 11.02%

10.57% – 11.01%

10.4% – 10.97%

Effective Taxable Yield (10% tax bracket)

9.21% – 9.75%

9.35% – 9.74%

9.21% – 9.72%

Subscription Date (Issue open – close)

3rd Oct,13 – 31st Oct, 1317th Sep,13 – 14th Oct, 13Subscription closed in month of Sep,13

Source: Company reports, www.InvestmentYogi.com

In this financial year, we had three tax free bonds from state-owned owned companies as discussed above. Out of which, REC subscription closed in Sep, 2013. Now you as an investor have two options i.e. whether to invest in HUDCO or IIFCL tax free bonds. Well, looking at credit rating profile of both the companies we can say rating of “AAA” to IIFCL denotes financials are stable and is better compare to “AA or AA+” given to HUDCO.

Analysing coupon rates of IIFCL and HUDCO, we can say IIFCL offers lower coupon rates to investors for investing in 10 and 15 years while compare to HUDCO for same period. But, by investing for 20 years in IIFCL tax free bonds, you get marginally higher coupon rate compared to HUDCO as shown in above table. So, opt to invest for 20 years in IIFCL tax free bonds if you have surplus funds to invest in debt instruments.

We advise, you consult your financial planner before investing in this tax free bond to analyse whether it contributes to your long term goal and suits your risk profile.

Click the link given below to get prospectus and application form of IIFCL Tax Free Bonds:

http://www.iifcl.org/Content/Tax%20Free%20Bonds%202013%20Tr-III.aspx

About the Author:

Hiral Thanawala is a PGDM (Finance) graduate and Certified Financial Planner with an experience of over 5 years in equity market and personal finance domain. He can be reached at expert@investmentyogi.com

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