NHAI sees demand for tax-free debt

NHAI sees demand for tax-free debt

India’s state-owned road builder plans to raise as much as 10,000 crore through a sale of bonds starting next week, betting that a downbeat stock market will attract investors to the safety offered by the tax-free debt offering.

Proceeds from the sale by the National Highways Authority of India (NHAI) will help acquire land for the building of new roads and pay contractors for construction, said J.N. Singh, member (finance), NHAI. Bonds of two maturities are being sold—10 years and 15 years. The first offers an annual 8.2% return, and the second 8.3%.

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Roads minister C.P. Joshi talks about NHAI’s plan to raise 5,000 crore through tax free bonds for investors of all kinds

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NHAI aims to raise 5,000 crore through the sale with a so-called greenshoe option for a similar amount. This means that the company can retain another 5,000 crore of subscriptions as long as there is excess demand forthe issue that opens on 28 December and closes on 11 January.

The bond sale is expected to attract investors given the current downbeat investment climate for equities. With the equity markets having slumped as much as 21.24% this year, as measured by the Bombay Stock Exchange’s benchmark Sensex, the bonds are seen to offer a safe haven for investors.

NHAI, the nodal agency for developing and maintaining national highways across the country, announced the sale of its first-ever tax-free bond sale on Friday. The bonds will have a face value of 1,000 each and will fall under section 10 (15) of the Income Tax Act, 1961, making interest income on them exempt from tax.

The sale comes at a time when the infrastructure sector is passing through a slowdown mainly on problems related to land acquisition and a lack of enthusiasm on the part of banks to lend to the sector because of the fear borrowers may default.

“We are receiving good feedback and are hopeful of raising 10,000 crore," said NHAI’s Singh.

“The proceeds from the issue would be utilized for making front-end payments for roads to be built on EPC (engineering, procurement and construction) contracts, acquisition of land for expressways as well as for dispute settlement," Singh said. The highways authority hopes to award contracts for 21,900km of roads during the next three financial years.

Of the total issue size, 30% has been earmarked for retail investors, who can invest as much as 5 lakh each. Another 30% has been earmarked for high net-worth individuals (HNIs), who can invest in excess of 5 lakh; there’s no maximum limit for this class of investors. The remaining 40% has been reserved for institutional investors.

“This is a good opportunity for HNIs as well as institutions to park their excess (funds) and earn tax-free income," says R.K. Gupta, managing director, Taurus Asset Management Co. Ltd.

Retail investors, however, won’t be able to use the investment as a tax-saving tool and deduct it from their taxable income for the fiscal year ending 31 March—meaning that the bonds may not find favour with people who start tax planning around this time, Gupta said.

The long lock-in period and the existence of schemes such as Public Provident Fund, which offers an annual 8.6% return that’s tax-free and helps investors deduct the amount of investment from their taxable income, may prove to be a deterrent to retail buyers.

“The returns are good, but not extraordinary," said Mahendra Kumar Jajoo, executive director and chief investment officer, fixed income, Pramerica Asset Manager Pvt. Ltd.“It is only good for HNIs; ret-ail investors have better options."

With economic growth set to slow this year to an expected pace of 7.5-7.75% from earlier projections of 9%, the outlook for equities remains uncertain.

Overseas investors, who drive the Indian stock markets, have been deserting equities. They have sold a net $554 million (around 2,936 crore) of equities so far this year, compared with net purchases of $29.4 billion in 2010.

“NHAI bonds have received the highest rating from three rating agencies, which indicates a high degree of safety. With the interest rate likely to soften in the near future, this is a good opportunity for HNIs and institutions," said Y.P. Narang, a Delhi-based independent consultant for fixed income securities. “Even those retail investors who have enough surplus can take a look at this."

NHAI bonds have been assigned rating of “Crisil AAA/Stable" by Crisil Ltd, “CARE AAA" by CARE Ratings and Fitch AAA(ind) with Stable Outlook" by Fitch Ratings. These ratings indicate the highest degree of safety of principal and interest.