The Government has slashed the size of tax-free bonds to be issued by its companies this year by Rs 7,500 crore. It has allowed 10 state-run companies to raise Rs 53,500 crore through issuance of tax-free bonds by March 2013. This is lower than Rs 60,000 crore announced in Budget 2012-13, but significantly higher than Rs 30,000 crore allowed in 2011-12.

As the notification has come barely four months before the end of the financial year, investors will see a spate of tax-free bonds in the next few months. India Infrastructure Finance Company Ltd (IIFCL) will be the first government institution to hit the markets with the first tranche of its Rs 10,000-crore bond issue on November 12.

"We have just got approval from the government for raising Rs 10,000 crore from tax-free bonds. We will be issuing first tranche Rs 500 crore on Monday, IIFCL Chairman & Managing Director SK Goel.

Tax-free bonds (figures in Rs crore)
Company  Budget  Notification
NHAI  10,000  10,000
IRFC  10,000  10,000
IFFCL  10,000  10,000
Hudco  5,000  5,000
NHB  5,000  5,000
Sidbi  5,000  --
Ports  5,000  3,500
Power  10,000  10,000
Total  60,000  53,000

Others companies which have been allowed to issue bonds include Indian Railway Finance Corporation Limited and National Highways Authority of India (Rs 10,000 crore each), Housing and Urban Development Corporation Limited, National Housing Bank, Power Finance Corporation and Rural Electrical Corporation (Rs 5,000 crore each), Jawaharlal Nehru Port Trust (Rs 2,000 crore), Ennore Port Limited (Rs 1,000 crore), and Dredging Corporation of India Limited (Rs 500 crore).

In the Budget, Small Industries Development Bank of India was also allowed to issue tax-free bonds of Rs 5,000 crore, but in the notification issued on Tuesday, the finance ministry did not name Sidbi. It also cut the amount for tax-free bonds issuance by the port sector from Rs 5,000 crore to Rs 3,500 crore. The port companies were allowed to issue bonds of Rs 5,000 crore in 2011-12 too, but they did not raise any funds. Last year IRFC was allowed to raise Rs 10,000 crore, NHAI Rs 10,000 crore, and Hudco Rs 5,000 crore.

Companies will have to raise at least 75% of the amount of bonds issued through public issue and 40% of this would be earmarked for retail investors. The rest can be through private placement.

IIFCL would first do a private placement to institutional investors to the tune of Rs 2,500 crore, while the retail portion of Rs 7,500 crore will be done in 20 tranches of Rs 500 crore each by March 2013. The coupon rate will be between 7.35 per and 7.40%.

The finance ministry said retail individual investors, qualified institutional buyers, corporate and high net worth individuals will be eligible to subscribe to the bonds which will have tenure of 10 or 15 years. In case of IIFCL the tenure will be 10, 15 or 20 years.