20 i-banks line up to sell IIFCL’s tax-free bonds

MUMBAI: The upcoming sale of tax-free bonds by Indian Infrastructure Finance Company (IIFCL) is set to become one of the largest bond issuances open to retail investors in many years. Merchant bankers say that if rightly priced, IIFCL bonds could revive confidence in the bond market among retail investors ��� the first time since 2003.

While all eyes are at what interest the bonds will give, bankers say there has been a lot of enthusiasm from banks, insurers and state-owned companies about the issue. In fact, close to 20 merchant bankers are believed to be in the fray to bag the mandate to sell these tax-free bonds, announced as part of the fiscal stimulus package by the government.

In a research note, BNP Paribas Securities India said IIFCL���s first tranche of Rs 10,000 crore of bonds would hit the market this week. ���We are yet to decide what part of the sum would be for the public issue (open to retail investors) and how much would be privately placed with large investors,��� said SS Kohli, chairman and managing director IIFCL. He
declined to comment on what will tenure of the bonds or their interest rate, also called coupon.

But merchant bankers familiar with the development say that the company will likely issue 5-year bonds with a coupon anywhere in the range of 6.5-7.5%. Most financial planners say that given their tax free status, rates at the upper end of the band would make them an ideal investment destination in times when interest rates are falling. The yield on the benchmark five-year corporate paper was at 8.45%, with the spread between the five-year corporate and government bond in the range of 325 points, as per Reuters data.

IIFCL has been allowed by the government to raise Rs 40,000 crore by issuing tax-free bonds. A majority of the money is expected to flow into highway projects, ports and power projects. The tax-free bonds may also become a popular investment choice since bank deposit rates have been falling with RBI continuously cutting benchmark rates.

IIFCL bonds will in a way compete with Nabard Bhavishya Nirman Bonds (10-year zero coupon bonds) and National Savings Certificate (NSC) since all three have government backing. Public issue of bonds was very popular at the turn of this century with financial institutions like IDBI and ICICI raising several thousands of crore through zero coupon bonds. But with rates rising rapidly since 2003, bonds started losing money.