India Refines Investment Rules for Tax-Free Debt to Spur Demand

India refined an investment rule to encourage companies to purchase tax-free debt as state-run infrastructure firms prepare to sell 500 billion rupees ($9.2 billion) of the securities.

The Ministry of Corporate Affairs in a circular today said companies can buy the debt as long as it yields more than the Reserve Bank of India’s bank rate. The rule previously limited companies to purchasing bonds with a “rate of interest” more than the RBI rate. The monetary authority’s bank rate is at 8.75 percent, while benchmark repurchase rate is 7.75 percent.

Prime Minister Manmohan Singh’s government is selling the tax-free securities to attract funds to build roads, ports and power plants in a nation where the quality of infrastructure is ranked below Kazakhstan and Guatemala by the World Economic Forum. Singh seeks to double spending on public work projects to $1 trillion by 2017.

“This brings clarity and should bring a positive impact to tax-free bond issuance in the remaining part of this financial year and next year,” Rajiv Datt, New Delhi-based managing director at Indian Railway Finance Corp. said in a phone interview today.

Indian Railway Finance, the funding arm of the state-owned rail network, extended the deadline for a 88.9 billion rupee tax-free bond sale to March 15, according to a newspaper advertisement yesterday.

Finance Minister Palaniappan Chidambaram said in his budget speech Feb. 28 some institutions will be allowed to raise tax-free debt “strictly based on need and capacity.”

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