IDFC infrastructure bonds face tough run again

Retail investors’ tepid response to infrastructure bonds is seen continuing even as the Infrastructure Development Finance Company (IDFC) launched the public issue of the second tranche of its long-term infrastructure bonds on Monday.

Issue arrangers concede that retail investors are lukewarm to the bonds, mainly because the rate of return is lower and the maximum investment limit for availing tax benefit is just Rs20,000 per financial year.

“Investors who had already invested in the first tranche of the earlier issue for tax benefit will not be able to go for it again. Most of the retail investors look forward to such tax befits under Section 80C,” said an issue arranger who did not wish to be named.

According to another issue arranger, investors are also shying away because yields are rising and at 8%, the rate of return on the 10-year IDFC bonds is lower than those on bank fixed deposits.

What’s more, there is a lock-in period of five years, after which they would be listed on the BSE and the NSE, and will become tradable.

A five-year fixed deposit with the State Bank of India (SBI), on the other hand, will fetch you 8.50% and the maximum amount you can invest is Rs1,00,000 per financial year.

The return on the IDFC bonds is slightly better in the cumulative option at 8% coupon compounded annually. Still, a conventional investor would prefer to invest in SBI fixed deposit, the arrangers concede.

IDFC has the authority to raise up to Rs3,400 crore in one or more tranches during FY11. In the first tranche, it raised Rs471 crore.

The second tranche is slated to close on February 4, but is seen getting extended.

“There are chances that this time also the issue closing date may get extended because infrastructure bonds are a new type of product and there is less awareness among the public regarding these products,” said Sandeep Mahajan, head of debt and capital market, R R Investors Capital Services.

The closing date of the first tranche of IDFC infrastructure bonds had also got extended in October 2010.

Next in line is a retail issue of infrastructure bonds by India Infrastructure Finance Company Ltd, worth Rs1,200 crore.

The issue, which will hit the market soon, could meet with the same fate as IDFC’s current offering, according to the issue arrangers.