Company Overview

The Indian Railway Finance Corporation (IRFC) Limited is the dedicated financing arm of the Ministry of Railways. Its sole objective is to raise money from the market to part finance the plan outlay of Indian Railways. The money so made available is used for acquisition of rolling stock assets and for meeting other developmental needs of the Indian Railways.

Business Analysis

Apart from the core business of meeting targeted borrowings through issue of both taxable and tax-free Bonds, term loans from banks/financial institutions and through off shore borrowings, IRFC also makes use of innovative financial instruments to diversify the debt portfolio and to minimize the cost. Its contribution to infrastructure build-up in Railways is very significant. IRFC’s funding has supported technology infusion in the Railways and has enabled Ministry of Railways to purchase new generation Locomotives from General Motors (USA) along with transfer of technology and new generation Coaches from Germany for use in high speed / Shatabdi trains.

Company’s total income for the half year ended September 30, 2011 stands Rs 218,679 lacs as against Rs 183,645 lacs as on September 30, 2010. The net profit stood at Rs 20,153 lacs as on September 30, 2011 as compared to Rs 18,380 lacs for the same period last year.

 

The details of the offering (Tax free bonds) are as follows:

Issuer	Indian Railway Finance Corporation (IRFC) Limited
Offering	Public Issue by Indian Railway Finance Corporation Limited (“Company” or “Issuer”) of Tax Free Secured Redeemable Non-Convertible Bonds in the nature of Debentures of face value of Rs 1,000 each, having tax benefits under section 10(15)(iv)(h) of the Income Tax Act, 1961, as amended, (“Bonds”), aggregating upto Rs 3,000 crore with an option to retain oversubscription upto Rs 6,300 crore (the “Issue”) to be issued at par in one or more tranches in the fiscal year 2012, on the terms and conditions as set out in this Draft Shelf Prospectus and separate Tranche Prospectus for each such tranche.
Rating	‘CRISIL AAA/Stable' by CRISIL, ‘[ICRA] AAA’ by ICRA and ‘CARE AAA’ by CARE
Security	The Bonds issued by the Company will be secured by creating a charge on the movable assets of the Company comprising of rolling stock such as wagons, locomotives and coaches by a first pari passu charge, present and future, as may be agreed between the Company and the Debenture Trustee, pursuant to the terms of the Debenture Trust Deed.
Face Value	Rs 1,000 per bond
Issue Price	At par (Rs 1,000 per bond)
Minimum Subscription	10 bonds and in multiples of 5 bonds thereafter
Tenure	Tranche-1 Series I: 10 years Tranche-1 Series II:15 years
Coupon rate	Tranche-1 Series I: 8.15% p.a. for category III investors and 8.00% for category I and II investors (see below for details) Tranche-1 Series II: 8.30% p.a. for category III investors and 8.10% for category I and II investors (see below for details)
Interest Payment	Payable annually
Trustee	Indian Bank
Listing	BSE & NSE
Depository	National Securities Depository Limited and Central Depository Services Limited
Registrars	Karvy Computershare Private Limited
Issuance	In dematerialized form and physical form
Issue Open Date	January 27, 2012
Issue Close Date	February 10, 2012
Deemed Date of Allotment	Deemed Date of Allotment shall be the date on which the Directors of the Company or any committee thereof approve the Allotment of the Bonds for each Tranche Issue.
Eligible Investors	Category I	Category II	Category III
	Public Financial Institutions as defined in section 4A of the Companies Act, Statutory Corporations, Commercial Banks, Co-operative Banks and Regional Rural Banks, which are authorised to invest in the Bonds; Provident Funds, Pension Funds, Superannuation Funds and Gratuity Fund, which are authorised to invest in the Bonds; Insurance companies registered with the IRDA; National Investment Fund; Mutual Funds; Foreign Institutional Investors (including sub-accounts); Insurance funds set up and managed by army, navy or air force of the Union of India; Multilateral and bilateral development financial institutions; State industrial development corporations Companies, bodies corporate and societies registered under the applicable laws in India and authorised to invest in the Bonds; Registered trusts which are authorised to invest in the Bonds; Scientific and/or industrial research organisations, which are authorised to invest in the Bonds; Partnership firms in the name of the partners; Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (No. 6 of 2009).	Investors applying for an amount aggregating to above Rs 5 lakhs across all Series in each tranche   Resident Indian individuals;   Hindu Undivided Families through the Karta; and   Non Resident Indians on repatriation as well as non-repatriation basis.	Investors applying for an amount aggregating to upto and including Rs 5 lakhs across all Series in each tranche   Resident Indian individuals;   Hindu Undivided Families through the Karta; and   Non Resident Indians on repatriation as well as non-repatriation basis.

Note: PAN card is mandatory for subscribing to these bonds. A self-attested copy shall be enclosed along with the application form.

Investors (across all categories) will also have the following options available at the time of subscribing to the issue:

Tranche-1	Series I	Series II
Minimum Application/ Face Value	Rs 10,000	Rs 10,000
In Multiples of	Rs 5,000	Rs 5,000
Tenor	10 years	15 years
Interest Payment	Yearly	Yearly
Coupon rate (category III)	8.15%	8.30%
Coupon rate (transferee / category I & II)	8.00%	8.10%
Yield on Redemption (category III)	8.15%	8.30%
Yield on Redemption (transferee / category I & II)	8.00%	8.10%

(Source: Draft prospectus registered with SEBI & PersonalFN Research)

 

Well, after reading the details of the tax free bonds (as provided above), there may be still some more questions cropping up, which are answered hereunder:

 

• Is there a lock-in period for these bonds?
  
  No, these bonds do not have any lock-in period. The bonds would be traded onto recognised stock exchange and thus can be purchased and sold at the prevailing market prices on the exchange. If one wishes to hold until maturity, then the redemption would be made by the issuer.
   
• Is interest on these bonds Tax Free?
  
  Yes, the interest which one will earn would be exempt from tax.
   
• Will TDS be deducted from the interest payment?
  
  These bonds are tax free and hence not subject to TDS.
   
• Is demat account mandatory to invest in tax free bonds?
  
  The bonds can be held either in demat or physical form. But if one wish to trade onto the exchange, then it can happen only via demat mode.
   
• Are investments in these bonds eligible for deduction u/s 80C?
  
  The sum invested in these bonds is not eligible for any deduction under section 80C, 80CCF or 54EC. Hence, no deduction benefit is avail while one invests money into these bonds. However, as mentioned earlier the interest which you enjoy will be fully exempt from tax, and therefore no TDS will apply as well. However, capital gains on these bonds are taxable like normal corporate bonds.
  
  Thus, if the bonds are sold within one year of the date of purchase, the short-term capital gains arising would be subject to tax at slab rates. Similarly, if the capital gains are made after a holding period of one year, long term capital gains will be applicable at 20% with indexation benefit or 10% without any indexation benefit.
   
• Can a minor apply to these bonds?
  
  Yes, a minor can apply for these bonds, but only and only through a guardian.
   
• Can one apply in joint names?
  
  Yes, one may apply in a joint name. However, the demat account will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein.
   
• Who will get the interest in case of joint application?
  
  In case of joint application, interest will be accounted to the first holder only.
   
• My demat account is in joint name, but I want to apply is a single name?
  
  In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
   
• If I’m an NRI can I invest in these bonds?
  
  Yes, NRIs are eligible to invest in these bonds.
   
• Whether an applicant applying in the first day of opening of the issue is assured of allotment?
   
• The issue will remain open for at least 3 days. If the issue is over-subscribed within this period, the applicants will receive allotment on pro rata basis. Thus investors who have applied during this period will receive at least some allotment. If issue extends beyond 3 days, the applicant in first 3 days will receive full allotment.



 
• In whose favour the cheque is to be made?
  
  Cheques/Drafts have to be made in the favour of
  
  “IRFC Tax Free Bonds – Escrow Account – Tranche I" - for Non NRI’s
  
  “IRFC Tax Free Bonds – NRI Escrow Account – Tranche I" - for NRI’s
  
  “IRFC Tax Free Bonds – FII Escrow Account – Tranche I" - for FII’s
   

OUR VIEW:

In our opinion these tax-free interest bonds provide an excellent investment opportunity as the coupon offered under both the series is quite attractive. Moreover, highest rating of AAA from CRISIL and ICRA, makes it a safe investment avenue. Also the listing and trading of the bond (on BSE and NSE), facilitates a liquidity window to investors as one can exit even before the maturity / redemption date of these bonds, but as said earlier one need to hold these bonds in a demat mode. IRFC has smartly introduced the step-down feature which states that any buyer in the secondary market will only get non-retail (HNI and QIP) investor rate. The step-down feature is obviously to encourage serious investors to subscribe for the issue instead of trying to make a quick buck by swiftly selling it in the secondary market.

 

In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200

Add Comments

Comments
clearinghouse@unsw.edu.au Feb 24, 2012 The Benefits Of Tax Free Bonds Novel Investor Tax free bonds can be a great investment that lowers your tax obligations while still maintaining a fixed passive income .
sumit_badal111@yahoo.com Jan 25, 2012 Useful information. One query is, supposed one person purchase bond worth rs 10 lakh & enjoing interest amount . after some time ( Supposed after 4 year )he want that his four son get interest amount equally means can he endorsed this bond equally to his four son. pl reply.
sanjay_air@yahoo.com Jan 26, 2012 what would be likely liquidity if one has to redeem these bonds on listing? since step down feature is there, it may affect retail investors and hence affect liquidity. pl clarify..
research@personalfn.com Jan 27, 2012 Dear Mr Sanjay, Investing in bonds should not be done purely for availing listing gains. Yes the step down feature may affect the liquidity.
research@personalfn.com Jan 27, 2012 Dear Mr Sumit, The transferee will not be able to enjoy the interest rate of the original allottee.

 1 2