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More infrastructure bonds on the anvil—but what about credit ratings?

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.

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COMMENTS

pradip Mukherji

6 years ago

Why for IFCI Bond it is necessary to have a Demat account. Do all Indians have Demat Acccount? Is it not unfair to make it compulsary ?

REPLY

Sunil Wadhwani

In Reply to pradip Mukherji 6 years ago

Mr. Mukherji,
U R 100% correct !
This insistence for demat account is a ridiculous requirement. My wife does not have a demat account and if I open one for the sake of this 80CCF benefit, the yearly maintenance charges by any DP would wipe out my tax benefits completely.
Hopefully the follow up issues from LIC and IDFC may give certificates in physical form.

SUBHASH MEHTA

In Reply to Sunil Wadhwani 6 years ago

The subject matter has since been changed by you i.e. More Infrastructure Bonds are on the avail but what about its credit rating? However under the topic of Demat Account, my view is that every investor must have a Demat Account. It will ensure paperless delivery of security, Direct Credit of Dividend, Interest, redemption and other corporate action in the security & there remain no chance of any loss due to transit. Moreover if anybody desire to exit from security,he/she can do so quickly by selling the same through stock exchange. Market Rate on stock exchange and Repurchase price offered by the issuing company can be compared and best exit option can be used. Demat will be a compulsion for all persons, in near future, who have to invest in securities either for tax-saving or for other person. However this is not a subject matter of debate.

The Government may consider for some amendment in rules of these Bonds. Those who prefer to have delivery in paper form, they may be allowed to do so. By doing so, there may be more investment from persons who don,t like to have Demat Account and want investment in paper form only and also not want to choose stock exchanges for exit option after stipulated period.

SUBHASH MEHTA

6 years ago

Why these Bonds have lock-in-period for 5 years, when investment in Mutual Fund ELSS, ULIP, PPF etc. have lock-in-period of 3 years? The previous infrastructure Bonds, which were issued by ICICI & IDBI for taking additional rebate of Rs.30,000, were issued for tenure of 3 years. If the Govt. will allow to issue the new Bonds with lock-in-period of 3 years, then the issue will likely to fetch more investment in comparison to present terms. The tenure may be for 10 years but lock-in may be reduce to 3 years, to enable the investor to remain invested upto 10 years, if he/she desire so.

REPLY

sunil wadhwani

In Reply to SUBHASH MEHTA 6 years ago

Who r v 2 decide? The govt (Ministry of Finance) has decided the present terms and conditions. As it is, the scheme with 7.85% returns seems attractive only for those in the 30% tax bracket.

SOMESH

6 years ago

What the Ex Employee says is absolutely right, we have seen how this banks do the lease dealings, how they loot the investors. Mr. Wadhwani should not take it personal, but the ex employees views might be true, and he might be wanting to create public awareness.

REPLY

sunil wadhwani

In Reply to SOMESH 6 years ago

How and why do u feel that I took it personally.
Neither is IFCI or any other company which plans to issue bonds asking me or paying me to do propaganda on their behalf.
I VERY SIMPLY STATED THAT IF X OR Y OR Z has a personal fight with his employer this is not the forum to air views about the same.
Giving personal email ids or links to blogs or articles, HIGHLIGHTING one's frustrations should be reserved to one's personal blogs and NOT discussed in general context.

JUST FOR EVERBODY'S KNOWLEDGE, the government has decided to exempt infrastructure bonds from credit ratings. See article in DNA Money, dated 16th August 2010, on the 1st Page left side, last para, under STRAWS IN THE WIND.

Sunil Wadhwani

6 years ago

ALSO, issued in Public Interest

It is rather unfair on the part of any disgruntled and grudge filled EX-employee of any organisation to VENT his ANGER and FRUSTRATION in GENERAL towards any other organisations, whether it be for issuance of bonds, etc., etc.
A person with a seemingly high position, though in a Private entity, may have reason to have necessary controversy with his EX organisation, but to generalise and black list other companies, does not speak too highly of ones intentions.
I am fully aware that, there will be a backlash, as when frustrated to a limit, people go to any length to justify their personal thought processes (thats the hidden agenda) and small sincere investors like myself have to beware these growling and sharp toothed beings, from constantly snapping at all bystanders, trying their best to achieve anything out of nothing.
IFCI according to me, was a safe bet for getting my 80CCF benefit and have therefore invested my funds rather wisely.
Am not concerned about others view points as I am comfortable with what I have done, and the PUBLIC should not be misled into beliefs that are a formation of PERSONAL Grief and Anxiety, experienced by one.

REPLY

SOMESH

In Reply to Sunil Wadhwani 6 years ago

What about GTB? what is happening with US Banks? What about NBFC who looted us in form of Rated Fixed Deposits.

sunil wadhwani

In Reply to SOMESH 6 years ago

EXACTLY !
If u can get looted by a GTB, banks in the U.S, and by Rated Fixed Deposits, is it not better to stash all ur cash and sit tight at home, hoping that ur building does not fall in an earthquake and ur cash gets lost in the rubble.
Come on now, wisen up !
Investments in all forms, including a family business, have a certain amount of risk. Yes, even your so called savings account with a nationalised bank or a fixed deposit with the bank, can come to nought, in view of the lack of a powerful judiciary system in India.
Which of course we have come to live with because of our chalta hai attitude.

Amit Anand

6 years ago

Are these bonds available via online transactions like at demat sites : icici direct or Kotak?

Or one has to physically visit a brank branch/wealth managers to subscribe to ifci infrastructure bonds?

SunilWadhwani

6 years ago

IFCI has already begun a private placement from 9.8.10, of Unsecured redeemable, non-convertible Long Term Infrastructure bonds - Series 1 eligible for deduction under section 80CCF of IT Act, 1961 upto Rs 20000 for financial year 2010-2011.
Deemed Date of Allotment is
September 15, 2010
The interest rate is 7.85% for buy back option and 7.95% for NON buy back option, under cumulative and non-cumulative (15th September yearly) interest schemes.
These are under Compulsory Demat form hence demat account is a pre-requisute.
Each bond is of face value 5000 and redemption is on 15.09.2020.
However, under 7.85% bonds with buy back option, u can redeem the bonds after 5th,6th,7th,8th and 9th year only between 16th August to 31st August.
This buy-back facility starts from Year 2015 till Year 2019.
PAN of sole/joint depositors is compulsory and a self attested copy must be attached along with a blank cancelled cheque or a copy thereof for details such as ECS (MICR code) etc.
The FIVE YEAR LOCK-IN is compulsory for benefit of 80CCF.
Rating: BWR AA- by BRICKWORK RATINGS INDIA PVT LIMITED
Proposed to be listed on BSE

Trustee
Axis Trustee Services Limited

Depository
National Securities Depository Ltd. and Central Depository Services ( India ) Ltd.

Registrars
Beetal Financial & Computer Services (P) Ltd.

REPLY

Amit Anand

In Reply to SunilWadhwani 6 years ago

Are these bonds available via online transactions like at demat sites : icici direct or Kotak?

Or one has to physically visit a brank branch/wealth managers to subscribe to ifci infrastructure bonds?

sunil wadhwani

In Reply to Amit Anand 6 years ago

Am not sure about these bonds being available online. I and family members applied through Kotak on hard copy (physical form) with cheque in favour of IFCI Ltd. -Infra Bond together with copies of PAN of all holders of DEMAT A/c. which is compulsory.
Feel free 2 cal me at 9869009819 for doubts, which I hope I would b able 2 solve.

SUBHASH MEHTA

6 years ago

Fully agree with the author and 6 comments. Bonds should be rated and lock in period may be reduced to 3 years.

Sunil Wadhwani

6 years ago

Yes, these bonds should be rated. But, don't you think a tax savings instrument issued under permission from the Finance Ministry (For the Tax Benefits) and clearance from the RBI, should be GUARANTEED in any case. Imagine if your NSC, PPF, LIC premiums (All under 80C) were at any risk, would you invest ??
These CRISIL ratings and clearances by SEBI etc. are known to have been manipulated in the past.
A GUARANTEED (principal and interest) TAXABLE OR TAX-FREE INFRASTRUCTURE BOND is what is required.
The tenure is 10 years, but the lock-in is for 5 years only.

Navnit Parekh

6 years ago

I completely agree with Mr. Kanabar's view.Moreover why should be longer lock in period . It should not be more than 3 years .Even if you consider infrastructure sector, term should be notmore than 7 years against 10years.which is longer one .

satish minocha

6 years ago

These bonds are good no doubt, but are for a very long period. It should have been only for 5 years.












Sritanu Chatterjee

6 years ago

Dear Sir,

I think the bond has to be rated. The spread between two bonds depend on the credit rating, liquidity and maturity factor. If a bond is not rated then how come the yield between two bonds be justified. Moreover, without a credit rating it would be difficult for any institutional investor to put it in their books. I think, bond rating will be mandatory but a minimum rating will not be mandatory.
So only the RBI is proposing to have a CDS market.

Thanks & Regards,
Sritanu

Sunil Wadhwani

6 years ago

Power bonds issued by CRB Capital Markets (Bhansalli) were issued with some TAX Benefits.
Those who invested expecting government assurance were taken for a joy ride.
Investors must be very very very careful 2 say the least.
Be safe, not Sorry.

SANJAY PRABHU

6 years ago

Investors should go for safety rather than attractive coupons issued by NBFC and hence rating is a must for NBFCs

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