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Finance Minister Pranab Mukherjee was reported as saying last week that private sector companies would be allowed to issue tax-free infrastructure bonds to raise money for projects.
Finance Minister Pranab Mukherjee was reported as saying last week that private sector companies would be allowed to issue tax-free infrastructure bonds to raise money for projects. Earlier in February,as part of the Budget announcement,the minister said individuals would be entitled to tax benefits for investments up to Rs 20,000 in infrastructure bonds,over the benefits that they were already allowed for Rs 1 lakh worth of savings across other instruments. One could infer that we might be close to a situation in which private sector infrastructure firms could raise money through bonds that could be subscribed to by small savers.
Given that India is looking for $1 trillion during the Twelfth Plan period (2012-2017) to fund infrastructure projects,such ideas might sound good on paper. But for a variety of reasons,its hard to see too much money coming the way of private sector infrastructure firms. For one,infrastructure projects are large,calling for investments of anywhere between Rs 4,000-5,000 crore; typically,a megawatt of power costs about Rs 4-5 crore. Its unlikely private sector companies can raise that kind of money from small savers and what they can wont go very far. For instance,to raise say Rs 1,000 crore,they would need to tap 500,000 investors. Maintaining a record of subscribers and servicing them would be a cumbersome process even though the work could be outsourced. Typically,the denomination for tax-free PSU bonds has been far higher at Rs 5 lakh,though recently some institutions have reduced it to Rs 1 lakh.
But the bigger question really is whether retail investors would want to put their money into private sector bonds. Apart from the Tatas and Birlas and a few other companies,no private sector company has really inspired that much trust. It is true individuals do put money in corporate fixed deposits,since these typically offer better interest rates than fixed deposits of banks; but,by and large,small savers prefer to stay with established companies that have a track record. Many of the infrastructure projects that are coming up are being set up by relatively new companies,and its unlikely they will be able to convince investors to invest with them. Also,investing with an HDFC or a Tata Motors that have large and stable businesses is completely different from putting ones money in infrastructure projects that carry a high amount of risk. Even if the bonds are rated by a rating agency,it is doubtful savers will want to take a chance even though they stand to earn a slightly higher return.
Also,infrastructure projects are long-gestation projects and,therefore,the money that savers put in will be locked in for perhaps five years,making the investment illiquid,unlike fixed deposits. While the bonds can be listed on the stock exchanges,the corporate bond market in India sees very little action. So any attempt to sell in an illiquid market could result in a loss for the investor. From an investment perspective,therefore,its hard to see too much money flowing in directly.
Channelling household savings into infrastructure could be probably done through banks and insurance companies,far better placed to gauge the risk associated with projects. Perhaps investors could buy infrastructure bonds,floated by banks,for which they earn a better return but which are locked in for a longer period too,of at least five years. That money could be lent by banks exclusively for infrastructure projects. With banks doing the bulk of the lending to the infrastructure space these days,they are vulnerable to an asset-liability mismatch since they are financing seven-eight-ten year assets while borrowing for two and three years. To make it easier for them,the government may want to look at allowing them to float non-SLR bonds. In other words,they could be excused from setting aside some amount of the money that theyve borrowed,in the form of government securities,which they would normally do for their borrowings.
This could turn out to be a win-win situation; it would help reduce the cost of funds for banks,give them access to longer-term money and allow them to give investors a better return on their bonds. Savers would be more than glad to earn some extra money without taking on any extra risk even though it might mean not being able to use that money for a long time.
Insurance firms,which have access to long-term money,have been reluctant to take on project risk,preferring to buy into non-convertible debentures of blue-chip companies instead. They too need to be incentivised to lend to infrastructure. In the absence of a mature secondary bond market in the country,it is better that household savings be channelled through institutions.
The writer is resident editor,The Financial Express,Mumbai
shobhana.subramanian@expressindia.com
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