India Unveils Rules to Allow 480 Billion Rupees of Tax-Free Debt

India allowed 13 state companies to raise as much as 480 billion rupees ($7.9 billion) selling tax-free bonds this financial year, helping generate funds for infrastructure such as roads, ports and power plants.

The government will also allow sovereign wealth funds to invest in such debt for the first time, according to a Ministry of Finance circular obtained by Bloomberg News today.

Under the plan, India Infrastructure Finance Co. and Indian Railway Finance Corp. can sell as much as 100 billion rupees of debt each while Housing & Urban Development Corp., Rural Electrification Corp., Power Finance Corp. and National Highways Authority of India can sell as much as 50 billion rupees each.

Prime Minister Manmohan Singh’s government is selling tax-exempt bonds to help fund his plan to double spending on public work projects to $1 trillion by 2017. Presenting the union budget for 2013-14 in the lower house of parliament on Feb. 28, Finance Minister P. Chidambaram had said 500 billion rupees of tax-free bonds would be allocated to some institutions strictly on the basis of “need and capacity” next financial year.

Surabhi Sharma, the under secretary to the government who signed the Ministry of Finance circular, didn’t answer three phone calls to her office today. Rekha Shukla, a spokeswoman for the Central Board of Direct Taxes, couldn’t immediately comment.

‘Attractive Proposition’

“Because these bonds will be issued by government-supported institutions, they’ll be considered as good as sovereign bonds and sovereign wealth funds may find them an attractive proposition,” said R.V. Verma, the managing director of National Housing Bank, which itself has been allowed to sell as much as 30 billion rupees of tax-exempt notes this year. “Overseas sovereign wealth funds and investors are looking for such opportunities because the investment climate globally remains weak.”

Other companies mentioned in the circular include NTPC Ltd., which can sell as much as 17.5 billion rupees of the securities, and Indian Renewable Energy Development Agency Ltd. and NHPC Ltd., which are permitted to raise as much as 10 billion rupees each.

Ennore Port Ltd. and Airports Authority of India can issue up to 5 billion rupees each of tax-free notes, and Cochin Shipyard Ltd. can offer as much as 2.5 billion rupees.

The tax-free notes must be in maturities of 10-, 15-, and 20-years and pricing will be linked to government securities reported by the Fixed Income Money Market and Derivative Association of India, according to the circular.

The ministry has also mandated companies raise at least 70 percent of the aggregate amount allocated by public offerings, of which about 40 percent must be sold to individual investors, according to the document.

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