Monday, January 23, 2012

IRFC Tax Free Bonds

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IRFC, Indian Railway Finance Corporation Limited, a Government of India undertaking has come out with an issue of tax free secured redeemable non-convertible bonds aggregating to Rs 5200 crore. This comes after NHAI and PFC came out with similar bond issues late last year. The interest income arising out of these bonds are totally exempt from tax as per provisions under Section 10 (15) of IT Act.

IRFC is the financing arm of Ministry of Railways with the sole objective of raising funds from the market to part finance the plan outlay of Indian Railways. The funds raised are used for meeting development needs of Indian Railway and other Ministry of Railway entities.

The issue shall open from 27 January, 2012 and shall close on 10 February, 2012. 45% of the issue is reserved for QIBs, 25% for HNIs and 30% for retail investors (investment amount less than Rs 5 Lacs).

2 options:
1. 10 year bond: 8% interest rate for QIBs and HNIs and 8.15% for retail investors.
2. 15 year bond: 8.1% interest rate for QIBs and HNIs and 8.3% for retail investors.

If retail investor sell the bonds during the lifetime of the bond, then it will start carrying a lower coupon or interest rate applicable to other categories.

The bonds will be alloted on a first come first serve basis and can be issued both in DMAT as well as physical form. The bond will get listed on both BSE and NSE.

During FY11, IRFC's total income witnessed a growth of 10.27% to Rs 3492 crore. Profit After Tax (PAT) increased by 9.6% to Rs 485 crore for FY11. In Q1FY12, IRFC's PAT was Rs 104 crore on total operating income of Rs 1073 crore.

IRFC bonds have been rated AAA by CRISIL, CARE and ICRA indicating highly stable investment. The interest rate for 10 year bond is 0.1% less than NHAI and PFC and same for 15 year bond. However, both NHAI and PFC issue have closed, so would recommend investors to invest some part of their fixed income portfolio in this issue (especially those who are in 30% tax bracket).
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