Infrastructure Bonds - IDFC

Recently IDFC announced public issue of long term infrastructure bonds up to Rs. 3400 crores. These bonds are classified as “long term infrastructure bonds” and are issued under terms of Section 80CCF of the Income Tax Act. Thus investment in these bonds will be eligible for deduction equivalent to the amount invested, subject to maximum of Rs. 20000, from the taxable income. This deduction is over and above Rs. 1,00,000 deduction available under Section 80C.

Issue Details:

The bonds will be issued in four series:

Series	Interest Rate	Interest Pymt.	Buyback Option
Series 1	8.00%	Annually	No
Series 2	8.00%	Cumulative	No
Series 3	7.50%	Annually	Yes
Series 4	7.50%	Cumulative	Yes

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The bonds have the lock in of five years and are proposed to be listed on NSE and BSE on which they can be traded after the lock-in period.  Buy-back option is available after 5 years.  They are fully secured and are rated LAAA by ICRA, indicating highest level of safety.  Interest received is taxable as interest receipts.

The issue is open for subscription from September 30, 2010 till October 18, 2010. It seems to be on first come first serve basis and it is advisable to invest early, in case one is planning to do so.

How to invest?

As per the prospectus, the application forms can be obtained from the company, lead managers, lead brokers or any other broker who is the member of BSE and NSE. Hence it seems that you can get the application forms from your neighbourhood broker.

Whether to invest in this?

The investment gives tax deduction to the extent of principal investment, subject to maximum of Rs. 20,000. Taking the tax benefit in to account, the effective interest rates becomes attractive.

Series	Coupon Rate	Effective Interest Rate*
Series 1	8.00%	11.58%
Series 2	8.00%	11.58%
Series 3	7.50%	10.85%
Series 4	7.50%	10.85%

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*Assuming tax slab of 30.90%

IFCI had earlier issued similar bonds in August 2010 and their coupon rate was 7.85% (with buyback option) and 7.95% (without buyback option). Besides, IFCI and IDFC, LIC & L&T Infrastructure are also planning to raise funds through such bonds. The interest rates for such bonds must be in line with government security of similar maturities and since interest rates are expected to rise in next 6 months horizon, the coupon rate of future issuers may be a slightly higher than IDFC and IFCI issues. However, the difference may not be much.

One must avail Section 80CCF benefit of Rs. 20,000. He may think of investing the entire Rs. 20,000 in one issue or can split it between two issuers.