The government is likely to allow private companies having 90% of their capital deployed in infrastructure projects and non banking finance companies (NBFCs) to issue long-term infrastructure bonds directly to investors.
In a discussion paper, the Planning Commission has placed the modalities of fund-raising through such bonds for consideration by the finance ministry.
“Project finance institutions and non-banking finance companies in the infrastructure sector should be eligible to issue tax-exempt bonds subject to prudential norms on their borrowing limits. This would enable them to raise funds at lower costs and also enhance supply of credit for infrastructure sectors,” the paper said.
On issuances by private companies, the panel said there are over a crore investors in the equity markets. “A good proportion of them can be expected to invest directly in infrastructure bonds issued by private companies,” it said.
“Since most of the debt raised through the infrastructure bonds would ultimately be utilised by private sector companies, they should be allowed to directly reach household investors instead of relying on the intermediation of financial institutions,” the paper said.
Finance minister Pranab Mukherjee had in his Union Budget speech announced a tax deduction of up to Rs 20,000 per year for individuals investing in long-term infrastructure bonds.
This was over and above the Rs 1 lakh that can be claimed under the Section 80C of the Income Tax Act.
And as private companies skirt intermediaries, they may be able to pass on the disintermediation spread that is engendered by offering higher interest rates to investors willing to take a slightly greater risk.
“But to safeguard their interest, only AAA or AA-rated companies should be allowed. Special purpose vehicles may also be allowed to issue these bonds with a guarantee from their parent which must have a AAA rating,” the paper said.
Conversely, as these bonds enjoy a component of tax relief, companies can also try and issue them at lower interest rates, said experts.
To ensure a fair distribution of the concessional facility among competing issuers, a ceiling could be considered for each project finance institution and NBFC either in absolute terms or as a proportion of their annual borrowings, the paper said.
The Planning Commission, however, is not in favour of allowing banks to raise funds under this scheme.
“Banks are almost reaching their limits in terms of various exposure norms. Giving them extra funds may not increase the volume of bank credit to the infrastructure sector. Secondly, banks already have access to low-cost deposits and should not, therefore, crowd out other eligible entities that lack such access. In case banks were to issue such bonds even without any tax exemption, they should be able to raise funds on their own. As such, there may not be much advantage in including commercial banks under this scheme,” the paper said.
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