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IDFC Infra Bonds Tranche 2 - Growth Plans

| 2/9/2012 9:30 PM Thursday

The Infrastructure Development Finance Company (IDFC) had a mandate to raise Rs 5000 crore in FY12 by issuing infrastructure bonds. It raised a part of this amount with the first tranche of infrastructure bonds in December 2011, and is hitting the markets with its second tranche now. The company raised an aggregate of Rs 532.62 crore in tranche 1. This time, it plans to raise funds approximately up to Rs 4400 crore.

We believe that this issue may not be fully subscribed, and the company may hit the market with another issue in March 2012. However, investors would do well to invest right now and not wait for the next tranche, as the interest rates on government bonds are softening, and therefore, the coupon rate is likely to be less than the current rate going forward or will be at similar levels.

Long term infrastructure bonds qualify under Section 80CCF of the Income Tax Act, 1961, as an investment on which tax deduction can be claimed. Investment in such bonds allows for deduction in taxable income up to Rs 20000 over and above the deduction of Rs 1 lakh available under Section 80C. The bonds will be available for a minimum tenure of 10 years, with a lock-in period of five years. Only Resident Individuals (Major) and HUFs can invest in these bonds. However, one should note that the interest earned on these bonds is taxable.

After meeting the issue-related expenses, the funds raised through the issue will be used towards infrastructure lending. You can apply for a minimum of two bonds of Rs 5000 each (Rs 10000 in aggregate), and in multiples of one bond thereafter.

The issue opened on 11th January, 2012, and will close on 25th February, 2012. The bonds are proposed to be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). There are two options available to investors, of which Option I offers annual interest payment while Option 2 has a cumulative interest payment facility. Both the options have a coupon rate of 8.70 per cent. The bond comes with a buyback option at the end of the fifth year.

We believe that one should invest in the bond and not wait for the last minute for tax planning. We would advise investors to select Option I, which gives the best yield to maturity, and to select the buyback option after five years, which will give attractive returns.

Issue Information
ParticularsOption IOption II
Face Value Rs 5000
Minimum Application Rs 10000 (i.e. 2 Bonds)
Horizon 10 Years
Coupon Rate (%) 8.70 p.a 8.70 compounded annually
Interest Payment Annual Cumulative
Maturity Amount  Rs 10000* Rs 23030*
Buyback Option  At the end of the 5th year
Buyback amount at the end of the 5th year Rs 10000* Rs 15180*
Lock-in Period 5 Years from the deemed date of allotment
Tax Rate (%) Effective yield (Pre-tax) if invested till maturity
10.3 10.41 9.89
20.6 12.41 11.24
30.9 14.81 12.79
Tax Rate (%) Effective yield (Pre-tax) if opted for buyback option
10.3 11.52 11.1
20.6 14.82 13.84
30.9 18.75 17.05
*Assuming that the amount invested is Rs 10000


 

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