by Moiz Mannan
Non-resident Indians (NRIs) who are depositing tonnes of money in Indian bank accounts need to become aware of another safe and lucrative avenue that has presented itself in the form of infrastructure bonds.
Around `16,000 crore out of `53,500-crore worth bonds on offer are expected to be made available to retail investors over the coming months.
The government this year has allowed India Infrastructure Finance Company Ltd (IIFCL), Indian Railway Finance Corporation Limited (IRFC) and National Highways Authority of India or NHAI to raise `10,000 crore each through the issue, Housing and Urban Development Corporation Limited (Hudco), National Housing Bank, Power Finance Corporation and Rural Electrical Corporation (`5,000 crore each), Jawaharlal Nehru Port Trust (`2,000 crore), Ennore Port Limited (`1,000 crore), and Dredging Corporation of India Limited (`500 crore).
In the budget for the present fiscal, the government had proposed raising of `60,000 crore through tax-free infrastructure bonds. However, the notification that came out last month slashed the amount by `6,500 crore. In the last financial year, the government-run infrastructure entities raised a total of `30,000 crore through these bonds.
Companies will have to raise at least 75 percent of the amount of bonds issued through public issue, out of which 40 percent would be earmarked for retail investors. The finance ministry notification has classified Retail individual investors “those individual investors, Hindu Undivided Family (through Karta), and Non Resident Indians (NRIs), on repatriation as well as non repatriation basis, applying for up to `10 lakhs in each issue”.
According to data from the Reserve Bank of India (RBI), the dollar inflows from NRIs into bank deposits more than doubled during April-October this year to $10.14 bn owing mainly to the promise of higher returns and a weak rupee. During the corresponding period last year, inflows were at $4.88bn.
Banks on an average offer 7 to 8 percent interest rate on deposits with 6-12 months tenure for NRIs. While banks have slashed interest rates on deposits over the last three months, NRI deposits still give high returns compared with those of other countries.
Economists and analysts are unanimous in predicting a rate cut by RBI sooner than later. Typically, when the interest rates go down, bond prices go up. Interest rates seem to have peaked in India. There is a very high possibility that the rates will start moving down from here. When this happens, investors will also gain in terms of bond prices going up.
With this outlook, it might be a good idea for the risk-averse NRIs and those wishing to diversify their portfolios to look at the slew of infrastructure bonds on the anvil.
The Indian government has major plans for infrastructure development in the 12th Five Year Plan. The need for infrastructure is pegged at $1,000bn. Keeping in view the massive need of funds, many firms in India have launched infrastructure bonds.
For one, such investments are absolutely safe. Most of the companies offering the bonds are highly rated by rating agencies and, above all, are government owned. The risk of losing this money, therefore, is almost zero.
The bonds will fetch returns of 8 to 8.3 percent. While this might not be as high as returns promised by equity-linked assets, there is much higher safety here. Also the interest earned from the bonds is totally tax-free. The only negative here is that from this fiscal bond investments have stopped yielding income tax deduction benefits under Section 80CCF. Bonds also offer regular income in the form of coupon. Hence, investors who need regular income can go for bonds investment.
A month or so back, the government cut the withholding tax on rupee infrastructure bonds down from 20 per cent to five per cent. The lower tax will apply to bonds issued between July 1, 2012 and June 30, 2015. Earlier this year, the government cut the withholding tax on dollar-denominated infrastructure bonds - which applied to interest payments by Indian borrowers - and on external commercial borrowings.
The government has given prominence in its latest economic and fiscal reforms to repairing India’s sagging infrastructure, including establishing a National Investment Board to speed up clearance for projects.
Usually these bonds come with a maturity period of 10 or 15 years and have a lock in period of 5 to 7 years respectively. One can sell the bonds in a Dematerialized form after the completion of the lock in period.
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