Report on Indian Railway Finance Corporation (IRFCL) tax free bond issue. According to the research firm, the company's performance has been rated excellent for 11 years in a row by the Department of Public Enterprises. The bonds issued by the company will be secured by creating a first pari passu charge on the movable assets of the company.

IRFCL has come out with its tranche II bond issue. The issue carries a coupon of 7.38% and 7.54% for 10 years and 15 years, respectively. Interest received on the bond is fully exempt from income tax. The pre-tax yield on the bond for the highest tax bracket investors, therefore, works out to 10.68% and 10.91% for 10 years and 15 years, respectively, higher than 8.5-9% on bank fixed deposit and other stable fixed income instruments. CARE and Icra have assigned AAA rating for the bond issue, which is the highest credit rating. IRFCL is a wholly-owned government company, which finances the railways. The company's performance has been rated excellent for 11 years in a row by the Department of Public Enterprises. The bonds issued by the company will be secured by creating a first pari passu charge on the movable assets of the company. The bonds, therefore, are a safe avenue to earn tax free income.

Issue details:

Government of India, acting through the Ministry of Finance, has authorised IRFCL to issue tax free, secured redeemable, non-convertible bonds of Rs 1,000 each aggregating to Rs 10,000 crore for FY13. The Central Government in exercise of powers conferred by Section 10(15)(iv)(h) of the Income Tax Act, 1961 authorises to issue during FY13, tax free, secured, redeemable, non-convertible bonds up to Rs 10,000 crore. The company vide above two notification has come out with a Rs 8884.6 crore tax free bond issue. Of Rs 10000 crore, the company has already raised Rs 1113.6 crore via private placement. It came out with the tranche 1 issue a few days back. As per media reports, it has collected ~ Rs 3000 crore.

Analysis

IIFCL's tax free bond comes with a coupon rate of 7.38% and 7.54% for 10 years and 15 years, respectively, for a retail investor. Interest received on the bond is fully exempt from income tax. The pre-tax yield on the bond for the highest tax bracket investors, therefore, works out to 10.68% and 10.91% for 10 years and 15 years, respectively, higher than 8.5-9% on bank fixed deposit and other stable fixed income instruments.

The coupon on the bond issued under the tax exempt clause is related to the prevailing government securities rates. The ceiling in the coupon rate for a AAA rated issuer is fixed at 50 basis points (bps) below the reference G-sec rate* for the retail investor and 100 bps lower for others. It may be noted that the differential rate for retail investors shall be applicable only to original allottees. In the event of sale/transfer by the original allottee of the bond, the subsequent allottee will get the rates of other investor's.

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