AFFLUENT investors had a couple of rare debt offerings to save on income tax this year. After a brief interval, the Indian Railway Finance Corporation (IRFC) mopped up close to Rs 2,000 crore by issuing tax-free railway bonds. This tax season also witnessed placement of two 54-EC capital gains bond issues by REC and NHAI, which together raised around Rs 2,300 crore.
The two ‘mega bond’ issues have attracted money from affluent investors who otherwise invested in mutual fund tax savers and ULIPs to save tax, according to wealth managers. The tax-free railway bonds got fully placed — collecting a little over Rs 1,900 crore — in just about three hours’ time, according to distributors. IRFC has pegged the coupon rate on bonds between 6.5% and 7.25% a year depending on the tenure (5-year, 7-year and 10-year-term available) of the tranche.
“The railway bond was a private placement issue, distributed among high net worth investors and a few corporates having large long-term cash surpluses,” said Ashish Agarwal, executive director, AK Capital, the manager to the issue.
“More money came into the 10-year bucket. Investors don’t have worries investing for longer term, as these are tradable bonds listed on exchanges,” Mr Agarwal added. According to wealth managers, the bonds are also used as collateral to raise money from the market.
IRFC has started the borrowing programme to fund its rolling-stock acquisition plans and meet rail modernisation expenditure. There are complaints that the railway bond issue was not advertised among retail investors in a big way. “Though the minimum investment limit was Rs 10,000, the issues were not given to retail investors. Most wealth managers were accepting investments of over Rs 2-3 lakh,” said a Mumbai-based independent finance analyst.
Tax-saving 54-EC capital gains bond issue by REC and NHAI also got a strong response from affluent investors. According to January figures, REC collected about Rs 500 crore, while NHAI raised over Rs 1,800 crore by way of capital gains bond issues. The issue had failed to attract buyers last year — issued towards the last months of the fiscal — as a result of the slump in real estate sector. In ’08-09, NHAI had raised Rs 1,630 crore against a target of Rs 3,000 crore. In ’07-08 and ’06-07, it had collected Rs 305 crore and Rs 1,500 crore, respectively, according to distributors’ logsheets. Falling real estate prices had brought down investments in capital bonds by about 30% during ’08-09, wealth managers said.
“Popularity is rising gradually for capital gains bonds. It will be even better next year, when property owners sell their asset at higher prices, assuming real estate price hold steady over the next one year,” said Harish Sabharwal, chief operating officer, Bajaj Capital.
Under income-tax laws, one can save on payment of capital gains tax if the amount is used for repurchase of property within a 12-month period. Alternatively, capital gains tax can be avoided by investing in capital gains bonds. These bonds bear a coupon rate in the range of 6.15 and 6.25%.