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Coupons on Tax free bonds to be capped between 50-115 basis points
November, 08th 2012

Eligible infrastructure companies will be able to offer about 7.5-8 percent on tax free bonds,following the approval of pricing by Central Board of Direct Taxes. Indian Infrastructure Finance Company Limited will be the first issuer, raising Rs 500 crore through a privately placed issue.

IIFCL is looking to raise Rs 500 crore in its first tranch through the tax free bonds. According to the CBDT notification, companies will have to raise about 75% of the sanctioned amount through public issues The coupon offered this year will be lower than last year,as yields on government bonds have softened from last year. But according to wealth managers, high networth individuals still stand to gain from investing in tax free bonds, since comparable instruments only offer about 6.50 percent after tax.

According to the CBDT notification, AA rated issuers can offer 50-100 basis points lower than the yields on government bonds as prevailing two weeks before the filing of the final prospectus. The AAA rated companies can offer 100-115 basis points lower than the yields on government bonds. But incase the ownership of the bond is transferred, the rate of interest will automatically be reduced by 15 basis points.

This time around the government has also capped the brokerage fee to 50 basis points from 1-2 percent last year.

Indian Infrastructure Finance Company Limited is the first issuer of the tax free bonds with an issue size of Rs500 crore.

The Indian government in its budget for the fiscal year 2012-13 has allowed six infrastructure companies-National Highways Authority of India, Housing and Urban Development Corporation, National Housing Bank, SIDBI, Indian Railways Finance Corporation, IIFCL to raise Rs 60,000 crore through these tax free bonds this year.

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