Source :FC : Sarita C Singh & KA Badarinath May 16 2010 , New Delhi
Private infrastructure companies can now easily access long-term and cost-effective funds with the governmentclearing the decks for them to raise money through tax-free bonds.
The route was cleared last week when finance minister Pranab Mukherjee approved the proposal to award tax-free status to bonds issued by private infrastructure companies and non-banking infrastructure finance companies, a finance ministry official said.
The decision will help companies to boost resources for public and private infrastructure projects, which were facing major financial constraints, the official said.
The official said all core sector companies and related non-banking financial companies (NBFCs) together would be able to raise only Rs 20,000 crore through tax-free paper.
They would have to follow stringent norms, the official said, and only AA plus rated pure infrastructure companies and related NBFCs would be eligible to issue tax-free bonds.
Infrastructure companies have welcomed the decision and some said it would reduce the cost of borrowing.
Srei Infrastructure chairman and managing director Hemant Kanoria said, “If that has happened, then it is a very good thing, because it was urgently required. It will help infrastructure finance companies to raise money in domestic market at lower cost and,
to that extent, we can also lend to private companies at a lower cost. Through tax-free bonds the cost of funds for infrastructure typically goes down by at least 200 basis points.”
Kuljit Singh, partner of audit and consultancy firm Ernst & Young in India, said it was a great move that would instantly lead to reduction in the cost of borrowing. However, one has to look into ratings, Singh said, as pension funds and even retail investors look for good ratings before investing.
L&T Power managing director and chief executive officer Ravi Uppal said it was a very good move and it would mobilise more earnings, which would come into the infrastructure segment.
“One of the things that is coming in way for infrastructure companies is investment, and if this kind of move is permitted, it will bring more earnings within the fold of the segment. Joint ventures, public-private partnerships and a whole lot of things will be triggered by this,” Uppal said.
GMR Energy chief executive officer Raaj Kumar said the move was positive but one had to read the fine print.
Jindal Power managing director R P Singh said it was great move for infrastructure sector as a whole.
On March 24, 2010, Mukherjee said that the government was considering opening up the window for issuing tax-free infrastructure bonds to private companies. So far, only state-owned Rural Electrification Corporation and National Highways Authority of India were allowed to issue such bonds.
Prime minister Manmohan Singh said last month that the investment needed for infrastructure sector was expected to grow to more than $1 trillion (Rs 45,00,000 crore) in the twelfth plan (2012-17) compared with $500 billion in the eleventh plan (2007-12).
To attract more funds for infrastructure development, the government allowed individuals to save more tax in budget 2010-11 by investing Rs 20,000 a year in long-term infrastructure bonds in addition to the Rs 1 lakh tax exemption under some sections.
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