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Our Bureau

New Delhi, July 3 For the first time since 2003-04, the Indian Railway Finance Corporation (IRFC) has been permitted to issue tax-free bonds as part of its budgeted borrowing programme of Rs 9,000 crore for 2009-10.

“IRFC has been given permission by the Finance Ministry to mobilise up to Rs 5,000 crore by way of tax-free bonds this fiscal,” said Ms Sowmya Raghavan, Financial Commissioner, Indian Railways.

The projected Rs 9,000 crore market borrowings for 2009-10 mark a substantial jump over the Rs 6,907 crore during 2008-09 and Rs 4,604.43 crore in the preceding fiscal.

IRFC uses the borrowed monies to acquire rolling stock, which it then leases out to the Indian Railways. The latter, in turn, pays a lease charge on the assets owned by IRFC.

Of the budgeted Rs 9,000 crore for 2009-10, IRFC has mobilised Rs 2,700 crore till the first quarter. The borrowings were at a weighted average cost of 8.25 per cent on a mean tenor of over eight years. This is lower than the sub-nine per cent average cost during 2008-09 on a tenor of 9.5 years.

“The leeway given to float tax-free bonds should help pare our cost by another 100-150 basis points,” said Mr R. Kashyap, Managing Director, IRFC. He, however, added that the actual amount that can be raised through this route depends on the market’s appetite.

“Our fund requirement is usually for long tenors that can even stretch for 15 years, whereas investors in tax-free bonds (particularly high net-worth individuals) may not want to lock up their funds for more than 5-7 years,” Mr Kashyap told Business Line.

Moreover, agencies such as National Highways Authority of India, Rural Electrification Corporation and India Infrastructure Finance Company Ltd too issue tax-free bonds. That makes the field more competitive for these instruments.

IRFC, incidentally, started off in 1987-88 by offering tax-free bonds. In 1987-88 alone, it raised Rs 959 crore through this route, which went up to Rs 1,612 crore in 1991-92, before tapering off to Rs 50 crore in 2003-04. Cumulatively, it issued tax-free bonds worth Rs 7,775 crore, before the Finance Ministry closed this window for IRFC.

While the IRFC raises funds at 8-9 per cent from the market, it receives lease rentals amounting to 12 per cent from the Railways.

As on March 2008, IRFC had financed 54 per cent of the 3,447 electric locos of Indian Railways, 43 per cent of its 5,210 diesel locos, 66.43 per cent of 41,623 coaches, and 51.55 per cent of 2,40,562 wagons.

Apart from IRFC, Rail Vikas Nigam Ltd (RVNL) — a special purpose vehicle created to finance bankable rail projects (mainly for port connectivity) in partnership with private players — is also scheduled to raise market borrowings of Rs 170 crore during 2009-10.

For 2008-09, RVNL’s borrowing programme, which is also handled by IRFC, amounted to Rs 283 crore.

More Stories on : Financial Institutions | Corporate Bonds | Railway Budget

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