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The notification on infrastructure bonds which was issued last month curiously omitted to mention that these would have to be compulsorily rated
The Centre has proposed to allow certain Non-Banking Financial Companies (NBFCs) to issue tax-free infrastructure bonds to ensure more finance for the sector. Curiously, one of the biggest omissions in the notification is a credit rating provision.
The guidelines includes a minimum tenure of 10 years, minimum lock-in period of five years, a ceiling to match yields with government securities and a couple of other clauses. According to the new guidelines, apart from institutions like the Life Insurance Corporation (LIC) of India, IDFC and Industrial Finance Corporation of India (IFCI), the bonds can be issued by an NBFC, classified as an infrastructure finance company by the Reserve Bank of India (RBI). Thus, the investor is likely to be exposed to various bonds issued by a gamut of institutions that qualify as infrastructure financing companies.
Does it make sense to club LIC with an NBFC? "From an investor perspective, the investor will find out how comfortable are they with the company. The NBFCs may also turn more competitive in order to attract more funds; they may offer comparatively attractive coupons," said Samir Kanabar, partner, tax & regulatory services, Ernst & Young.
One way to separate the quality of one bond from another is credit rating. Interestingly, the notification seems to have missed the credit rating provision altogether. "The present notification does not state that any credit rating will be required," admits an official from IFCI. Some believe a provision for credit rating should have been included. "Prima facie, they are not suggesting that there should be a credit rating, which is an issue," said an investment officer of an insurance firm.
Akash Deep Jyoti, head, corporate and infrastructure ratings, CRISIL, said, “The infrastructure bonds are expected to obtain the credit rating in view of their long tenure, and especially so if there is a retail issuance. These bonds will be able to attract those investors who are either in higher tax bracket or have surplus disposable income for long term investments. The government has restricted the issuance of infrastructure bonds to select institutions (which are rated high) and infrastructure finance companies (which are classified by RBI), and as these entities are already rated, this will ensure the minimum credit rating of the issuers.”
Issuance of tax-free infrastructure bonds is among the multiple options that the Central government is considering in order to cater to the huge investment outlay planned for infrastructure. The 12th Five Year Plan (2012- 2017) has an investment outlay of $1 trillion for infrastructure.
With indications that the Reserve Bank of India will consider increasing the hold-to-maturity...