IIFCL Tax Free Bonds – Dec 2012 – Review

After Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) Tax Free bonds, India Infrastructure Finance Company (IIFCL), another Government-controlled company, is issuing tax-free bonds between December 26 and January 11.

IIFCL Tax Free Bonds – Significant Points:

• Offer Period: December 26, 2012 – January 11, 2013 (the offer can be pre-closed on full subscription)
• Annual Interest Rates for Retail Investors:
  • 7.69% for 10 Years
  • 7.86% for 15 Years
  • 7.90% for 20 Years
  • The interest rates are 0.5% less for HNIs, QIBs and corporate subscribers.
• Price of each bond: Rs 1000
• Minimum Investment: 5 Bonds (Rs 5000)
• Max Investment Limit for Retail Investor: Rs 10 Lakhs
• Reservation: 40% reserved for retail investors
• Allotment: First Come First Serve
• Listing: Bonds would be listed on BSE and will entail capital gains tax on exit through secondary market
• Step Down Clause: The bonds will come with a step-down clause, according to which only the original allottee, who has subscribed under the retail category will receive the coupon of 7.69% – 7.90% depending on tenure. On sale or transfer, the benefit is lost and rates reduce to that applicable for other investors (7.19 per cent for 10-year bonds, 7.36 per cent for 15-year bonds and 7.4 per cent for 20-year bonds).

Why you should invest?

1. IIFCL is offering bonds with tenure of 20 Years with 7.9% interest rate. This is the highest so far
2. The bonds are secured to the full extent and have the highest credit rating (AAA)
3. The interest rates on future tax free bonds might be lower as RBI might moderate its policy rates from January 2013

Why you should not invest?

1. The interest rate offered by PPF is 8.8% tax free. You should exhaust your maximum PPF limit of Rs. 1 Lakh before you look for tax free bonds
2. If you are not in higher tax slab of 20% or more

Who should apply?

As for most tax free bonds, these are good for investors in high income tax bracket of 20% and 30%. Today the maximum rate offered by bank fixed deposit is 9.5%. This translates into a post tax return of 7.82% for 20% tax slab and 6.8% for 30% tax slab. This is lower than IIFCL’s 15-year and 20-year bonds.

Along with the above, it suits investors who want regular income from interest payment and have low risk profile.

About IIFCL:

IIFCL is among the major financiers to various infrastructure projects in the country. As on March 2012, it had disbursed loans of Rs 22,543 crore.

The company has been consistently profitable since its establishment in 2006, and its consolidated profit in FY-12 doubled over the previous year to Rs 678 crore. It did not have any non-performing advances in FY-12.