IRFC's record market borrowings may prompt IPO

Is an IPO by the Indian Railway Finance Corporation (IRFC) in the offing?

The possibility may not be ruled out, given the additional equity needed to underwrite its massive Rs 20,454.38 crore borrowing programme on behalf of the Indian Railways for the coming fiscal.

As on March 31, 2010, IRFC had a paid-up share capital of Rs 1,091 crore. Since the Reserve Bank of India's norms mandate a 10:1 debt-equity ratio for non-banking finance companies, it necessitates additional equity infusion to raise the budgeted Rs 20,594.38 crore.

Equity infusion

The equity infusion can, in turn, be made either by the promoter (the Railways) or through IRFC itself issuing fresh shares to the public. The Centre had recently allowed IRFC to enhance its authorised capital from Rs 1,000 crore to Rs 2,000 crore.

While IRFC can also raise borrowings that are not registered in its balance sheet – through special securitisation deals as resorted to in the past – the Financial Commissioner of Railway Board, Mr Samar Jha, told Business Line that “we will still have to infuse Rs 600-700 crore of additional equity”.

If the additional equity were to be raised through a private placement or IPO, the IRFC would be able to charge a premium on the shares issued. This would not be the case if the shares are subscribed at par by the IR. Mr Jha, however, maintained as of now, “The Railways will put in the additional equity”.

Of the Rs 20,454.38 crore, IRFC would be mobilising Rs 11,800 crore to finance the acquisition of rolling stock for the Railways and another Rs 140 crore for Rail Vikas Nigam Ltd (RVNL), which invests in various bankable rail-link projects with private partnership.

The balance sums raised would go to fund select capacity enhancement projects involving gauge conversion (Rs 2,107 crore), doubling (Rs 5,293 crore), electrification (Rs 854 crore), traffic facilities (Rs 300 crore), and signalling and telecom works (Rs 100.38 crore). “This is the first time IRFC monies would go for financing rail infrastructure other than rolling stock in a major way,” noted Mr Jha.

Tax-free bonds

In her Budget speech, the Railway Minister, Ms Mamata Banerjee, said that IRFC would float additional Rs 10,000 crore of tax-free bonds in 2011-12. “This debt will be on the Railways' balance sheet and not on IRFC's. The modalities are being worked out,” Mr Jha added.

Meanwhile, IRFC's efforts to raise large sums through tax-free bonds in the current fiscal have met with limited success. The company, which tried raising Rs 3,080 crore through private placement between November 15 and December 3, was able to mop up only Rs 1,311 crore.

As on March 31, 2010, the IRFC had acquired 5,060 locos, 32,115 coaches, 139,659 wagons and 85 cranes and track machines for leasing out to the IR. The Railways, in turn, pays an annual lease rental for use of this rolling stock.