Indian Railway Finance Corporation with Its First Tax Free Bond This Fiscal Year

25 Jan

The Finance Ministry has allowed Indian Railway Finance Corporation to raise Rs.10, 000 crore through tax free bonds this fiscal year. The proposed amount will be utilized for financing select capacity development work. The ministry has also permitted Housing & Urban Development Corp., Power Finance Corp. and the National Highways Authority of India to sell such tax free bonds.

The issue for Indian Railway Finance Corp. Starts on 27^th Jan, 2012 and will close on 10^th Feb, 2012. The issue size is of Rs. 6,300 crore having a face value of Rs.5000 for each bond. The minimum investment is of Rs. 10,000 and further in multiples of Rs.5, 000 thereafter. The issue is available with two investment options, one with 10 year maturity and another with 15 year maturity, interest in both cases paid annually.

The issue has been highly rated by CRISIL as CRISIL AAA and CARE AAA by CARE. The bond is expected to get listed on both NSE and BSE. The lead managers to the issue are SBI Capital Markets Ltd., A.K. Capital Services Ltd. and ICICI Securities Ltd. Indian Bank is the trustee for the bond holders.

The current issue sounds different as because, 30% of the issue is reserved for retail investors, and are likely to get higher interest rates in comparison to other category. An individual investing less than Rs. 5 lakh will be considered as retail investor. They are advised to subscribe directly for the issue as the early birds would avail the benefit of higher interest rates rather moving to stock exchanges. Purchasing from them makes you devoid of getting higher interest even though you are a retail investor.

The details of the issue:

Issue opens on	27^th Jan,2012
Issue closes on	10^th Feb,2012
Face value	Rs. 5000
Minimum investment	Rs. 10,000 & multiples of Rs. 5000 thereafter
Ratings	CRISIL AAA by CRISIL and CARE AAA by CARE
Lead managers	SBI Capital Markets Ltd., A.K. Capital Services Ltd. and ICICI Securities Ltd
Trustee for bond holders	Indian Bank
Listing	NSE & BSE
Series	I	II
Tenure	10 years	15 years
Interest rate	8.15%(retail investors) 8.00%(others)	8.30%(retail investors) 8.10%(others)
Interest payment	Annual	Annual

Well the idea behind the issue is to offer higher interest rates to retail investors who subscribes to the issue on priority basis and subsequently reducing the same. This would benefit the Indian Rail as they need not end up paying higher rates as some sell the bonds on exchanges before maturity. Hope the issue attracts more subscription from retailers this time, attracting NRI‘s also who can apply under any of the category. The current tax free issue is considered a good choice for investors looking for fixed income products.