Rama Krishna Vadlamudi, HYDERABAD October 15, 2010

Infrastructure Development Finance Company Limited (IDFC) has come out

with a tax-saving Long-Term Infrastructure Bonds issue. The bonds are fully
secured. The issue was opened on September 30, 2010 and closes on
October 22, 2010. Resident Individuals and HUFs (Hindu Undivided
Families) are eligible for a deduction of Rs 20,000/- from one’s total income
in a financial year under Section 80CCF of the Income Tax Act. This new
section was introduced this year only and is effective from April 1, 2010.
This deduction of Rs 20,000/- from total income is in addition to Rs 1.00
lakh deduction provided under Section 80C of the Income Tax Act.
(Please read the disclaimer at the end of the write-up.)
 Rama Krishna Vadlamudi, HYDERABAD October 15, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
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Salient Features of the Bond:

Minimum amount : Rs 10,000 and in multiples of Rs 5,000 thereafter

Maximum amount : nil

Maturity : 10 years

Lock-in-period : Five years

Buyback : After five years from the date of allotment

Issue opened on : September 30, 2010

Issues now closes on : October 22, 2010

Who can apply : Resident individuals or HUFs

PAN Number : Investors should compulsorily provide PAN number

Applications available : At IDFC, Kotak Mahindra Bank, Citibank, Enam
Securities, HDFC Securities, Sharekhan, ICICI Securities,
Karvy Broking, Axis Bank, IDBI Bank, etc.

Rating : ‘LAAA’ by ICRA Limited

Listing : The bonds will be listed on BSE and NSE

Trading : Trading will be permitted on BSE and NSE after the
five-year lock-in-period

Tax benefit : Maximum Rs 20,000 for individuals and HUFs under
Section 80CCF of the IT Act

Bond certificate – in Demat or Physical form:

Investors have the option to receive the bond certificate either in Demat form or in physical form.
If investors want to get the bonds in demat form, they have to mention their demat account in the
application form. Alternatively, they have the option of getting a physical certificate also.

Issue Structure:

The Bonds under Tranche 1, with a maturity of ten years, will be issued in four series.

 Series-1: Carry a 8% coupon, payable annually

 Series-2: Cumulative option, 8% coupon, compounded annually

 Series-3: Carry a 7.50 % coupon, payable annually; with a buyback option after five
years from the date of allotment

 Series-4: Cumulative option, 7.50% coupon, compounded annually; with a buyback
option after five years from the date of allotment

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 Rama Krishna Vadlamudi, HYDERABAD October 15, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

Liquidity:
These infrastructure bonds have a maturity of 10 years. In that sense, they are long-term
in nature. They have got a lock-in-period of five years. After completion of five years, the
issuer, that is, IDFC will buy back the bonds. During the lock-in-period of five years, no
loan facility will be available against the security of the bonds. Overall, the bonds are
illiquid.

Suitability:
As investment of upto Rs 20,000 qualifies for tax incentive under a new Section 80C of
the IT Act, investment of upto Rs 20,000 in these bonds will be attractive for individuals
and HUFs in the highest tax bracket of 30%. The highest benefit will be for those in the
tax bracket of 30%. These bonds are, however, beneficial for persons in 20% tax bracket
also. Tax deduction at source (TDS) on the annual interest payable is not applicable to
these bonds. However, interest income does not attract any tax incentive and will have to
be added to one’s income and taxed as per one’s individual tax slab.
Knowledgeable investors with high risk appetite can avoid these infrastructure bonds as
equities and equity-oriented mutual funds may fetch better returns provided one is locked
in equities for a long-term horizon of five to 10 years.

Risk of default:
These bonds by IDFC are rated ‘LAAA’ by ICRA Limited. This is the highest credit
quality rating by ICRA. As such, the risk of default is practically zero at this point of
time. However, as the bonds are of long term nature, investors have to carefully analyze
the risks involved in infrastructure financing. Reserve Bank of India had accorded
infrastructure finance company (IFC) to IDFC in June 2010 and as a result IDFC will
have to deploy 75% of its assets in infrastructure loans. IDFC is a non-banking financial
company (NBFC) of good repute involved in infrastructure project finance. IDFC was
originally promoted by Government of India, which now holds a 20% stake in it. The
chairman of the company is Deepak Parekh and the MD & CEO is Rajiv Lall.

Other issues:
LIC, IFCI, IIFCL, IDFC and NBFCs classified as Infrastructure Finance Company by
RBI are allowed to issue these bonds, called Long Term Infrastructure Bonds. As such,
more companies will be coming out with issues of such bonds that qualify for Rs 20,000/-
deduction under Section 80CCF of the Income Tax Act.
Source: www.idfc.com

Photo courtesy: IDFC

Disclaimer: The views of the author are personal. Please read the Issue Prospectus available at
www.idfc.com carefully before investing.

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 Rama Krishna Vadlamudi, HYDERABAD October 15, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

About me

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