Infrastructure bonds: Lack of choices

Suresh Krishnamurthy

WHAT can an investor do to claim the extra tax rebate of Rs 4,000 on investments in infrastructure bonds? Invest in ICICI Bonds, of course. What other alternatives does an investor have? None.

This dearth of alternatives to invest in infrastructure bonds is baffling, to say the least, given that the country needs every penny it can mobilise to invest in infrastructure development. Except for a few scarce offers from IDBI and the Noida Toll Bridge, this has been the situation for close to three years now.

For a retail investor's portfolio, this lack of alternatives can also have other harmful side-effects. Such an investor would be forced to invest at least 25 per cent of their tax-saving investments in ICICI Bonds. If such investments are made over a period of time, the exposure to ICICI even in absolute terms is likely to reach large proportions.

Even considering ICICI's relatively better credit quality compared to other FIs, such a situation is undesirable. This is especially so considering the state of affairs in companies run by the Jindals, Essars and Ispats, and who have borrowed a substantially large portion of the networth of the development financial institutions. It is not being suggested that ICICI is likely to default in its obligations. It is just unwise to invest such a large proportion of one's portfolio in any one company.

There are several companies investors would be willing to patronise. Companies such as the Infrastructure Development Finance Corporation, Nabard, National Highways Authority of India, and the Government's telecommunication projects are a few such candidates. Also, there needs to be competition for these funds. It does appear that the Government is favouring reduced competition for these funds to keep the cost of mobilisation of funds low. Take for example the bonds offered by Nabard for tax savings on capital gains. Nabard is offering rates much below market levels because there is no competition _ there is no alternative for investors seeking tax savings on capital gains. It is true that this is not the case with the ICICI bonds now. However, if this situation continues, savvy institutions such as the ICICI would most likely exploit it.