Infra Bonds to Provide Long Term Funding

A major area of concern for sustaining the real gross domestic product (GDP) growth in India has been the lack of

adequate infrastructure. The woefully low levels of public investment have rendered India's physical infrastructure

way behind many other emerging economies across the globe. This necessitates increased focus on financing of

basic physical infrastructure including power, road and water. Finance Minister Pranab Mukherjee has earmarked

Rs 1.73 trillion, about 46 percent of total investment allocations, for the infrastructure sector, in the current fiscal

year. Indian banks mainly provide short-term loans which are often inadequate for financing projects having long

tenure.

Raising funds through infrastructure bonds is not very popular in India due to the relatively under-developed

domestic bond markets and the long gestation nature of infrastructure projects. To make these bonds attractive to

investors, so as to augment the funds flowing into the infrastructure finance, government provides tax incentives for

investments in infrastructure bonds. These bonds are the first of its kind since the finance minister has announced a

new section 80CCF, which entitles a tax payer to exemptions on money invested in infrastructure bonds. On an

investment of Rs 20,000, an individual in the 30 per cent tax bracket can save Rs 6,000 of tax and earn an annual

interest in the range of 8 per cent. Market is poised for a flood of infra bond issuances in the coming months.

Recently Industrial Finance Corporation of India (IFCI) had completed a private placement of unsecured

redeemable, non-convertible long-term infrastructure bonds and has garnered Rs 100 crore. IDFC aims to raise Rs

3400 crore through infra bonds, which are open to retail and institutional investors. LIC has a mandate to raise up to

Rs 5,000 crore through infrastructure bonds, which is 25 per cent of its Rs 20,000 crore incremental investment in

infrastructure in the previous financial year. ADB plans to enter the Indian debt market early next year to raise funds

through rupee bonds to finance private sector infrastructure projects.

Long term funding perspective

"Infrastructure projects