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PF commissioner: Tax-free infra bonds dont give us advantage
December, 22nd 2010

India top retirement fund administrator has termed infrastructure bonds as risky, putting a question mark on the governments plan to part finance its $1-trillion infrastructure spend from the bond markets.

Central provident fund (PF) commissioner Samirendra Chatterjee told ET that infrastructure bonds are unsafe in the long term and their tax-free nature does not make much sense for pension funds.

We are already tax-free, so tax-free infrastructure bonds dont give us any advantage, said Chatterjee, who is the chief executive of the Employees Provident Fund Organisation (EPFO). The EPFO is Indias largest retirement fund with assets over $100 billion under its ambit. It manages $60 billion in pension assets and regulates an additional $40 billion in corporate retirement trusts.

Infrastructure bonds are less attractive in the short term than conventional debt instruments as they offer a lower rate of interest. These bonds, however, come with tax benefits that make their effective returns higher. But the tax advantage does not make them attractive as all PF income is tax free in India. Bonds with good returns can be considered, Chatterjee said. But if they are not giving us good returns, it makes no point for us as its also more risky and long-term.

The finance ministry and the Reserve Bank of India are keen to route long-term insurance and pension funds into infrastructure projects. Pension funds regulated by the EPFO could finance widening of 1.32 lakh km of state highways at the current cost of Rs 5 crore per km.

The EPFO has also disregarded a request from the Asian Development Bank (ADB) to reconsider investments in rupee-denominated infrastructure bonds. The bank wants to issue bonds in 2011 to raise Rs 2,711 crore to fund infrastructure projects in India.

The finance ministry had in 2008 opened the door for retirement funds to invest in rupee bonds issued by the World Bank, ADB and the International Finance Corporation.

But, the EPFO board had rejected the proposal because it wanted clarifications on the nature of these instruments and the guarantees they would come with. ADBs fresh request for a review has not been discussed by the EPFO board yet, as officials do not expect a change in the stance of the trade union-dominated board. Chatterjee, however, said the EPFO may consider the request if the bonds assure a good return.

As part of the first stimulus package in 2008-09, sovereign-backed India Infrastructure Finance Company had raised Rs 10,000 crore from institutional investors via tax-free infrastructure bonds.

IIFCL will raise Rs 1,200 crore more in the quarter beginning January. The infrastructure bonds launched this year have received a lukewarm response from retail and institutional investors, despite the tax breaks. These include. Rs 100 crore issuance by IIFCL, Rs 600 crore by IDFC and Rs 200 crore by Larsen & Toubro Infrastructure Finance.

Last Friday, former RBI governor YV Reddy also challenged the notion that bonds can fund infrastructure projects.

Where in the world has infrastructure been financed by the bond market? he asked at a meeting hosted by the central bank, pointing to the experience of Japan, the UK, Europe and China in infrastructure finance.

At the same event, deputy RBI governor Subir Gokarn stressed on the need to move the burden of financing infrastructure from banks to the corporate bond market where long-term pension and insurance money could be parked.

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