Indian Railways to partially offload Stake in some of its PSUs

New Delhi: To mop up resources, the Indian Railways is considering the option of divesting stake in some of its PSUs, which will be routed back to build infrastructure.

The Railways has set a target to raise ₹8.5 lakh crore over the next five years, of which ₹1 lakh crore will be invested in rolling stock, such as wagons, coaches and locomotives. It has already signed an agreement with LIC to raise ₹1.5 lakh crore for investment in infrastructure projects.

The move to partially offload stake in some of its public sector units (PSUs) was among the various options discussed by Railway Minister Suresh Prabhu in a recent meeting of the advisory board on financial matters, which includes KV Kamath, President, Development Bank of BRICs Countries and former Chairman, ICICI Bank; Arundhati Bhattacharya, Chairperson, State Bank of India; Rajiv Lall, Executive Chairman, IDFC; and Raghav Bahl, who heads Quintillion Media Pvt Ltd; and senior Railway officials.

Incidentally, the Railways has already asked its various public sector units to undertake valuations.

“The money from such stake sale could be routed as equity to form a joint venture company proposed to be set up with Indian Railway Finance Corporation (IRFC) as proposed in the railway budget. The total mobilised funds through such a non-banking finance company can be 10 times the funds,” said sources present in the meeting.

IRFC, a public sector unit, is the fund-raising arm of the Railways, and largely funds rolling stock.

CONCOR stake

The Railways is set to shed five per cent stake in Container Corporation of India (CONCOR), the only publicly listed Railways unit.

The other units where value can be unlocked are RITES, IRCON and Indian Railways Catering and Tourism Corporation (IRCTC).

But, the Railways is unlikely to sell stake in IRFC, with which Railways enters into annual agreements for repayments.

In this year’s budget, Prabhu had announced setting up an infrastructure fund, a holding company and a joint venture with an existing non-banking financial corporation of a public sector unit with IRFC, to raise long-term debt.

The debt can be raised from domestic as well as overseas sources, including multilateral and bilateral financial institutions keen on working with the Railways.

Another top railway official said that while many investors are waiting to put in money, the Railways has to first send investor-friendly signals.

“Railways need to tap the private equity market,” said the official.

IRFC seeks bids for arrangers to rupee-denominated bonds

New Delhi: Indian Railway Finance Corporation (IRFC) — the finance arm of Indian Railways — has sought bids from bond arrangers for issuing rupee-denominated foreign bonds, sources in the company and a bond arranger told.

“We have sent request for proposal (RFP) to appoint arrangers for our overseas rupee-denominated bond issue. We will invite bids in June after which we may finalise the arrangers for our issue,” said the source.

However, RBI is yet to bring out detailed guidelines on rupee-denominated overseas bonds. In April monetary policy, the regulator had proposed companies may be allowed to issue rupee-denominated bonds in offshore markets. “There are aspects that need clarity,” said a bond arranger.

Print“All processes will depend on the RBI’s guidelines and approvals. As far as the effectiveness of this route is concerned, pricing is a major factor, but we must take into account investor diversification we get when we go for rupee-denominated overseas bonds,” said an IRFC executive.

In April, the company had received the board approval to raise $1 billion or close to R6,300 crore through external commercial borrowing. The company’s overall borrowing target for this fiscal is R17,655 crore. It is yet to be seen how the pricing for the bond issues will pan out as it would be the debut rupee-denominated bond from a domestic entity.

Typically, when an issuer raises funds in dollar or other currency through offshore bonds and wants to utilise that fund in India, the company has to shell out the cost of swapping the currency into rupee which depends on the Mumbai Interbank Forward Offered Rate (MIFOR) — at present in the range of 6.9-7.9%.

In the case of Rupee-denominated bonds, the issuer can do away with the entire swapping cost as the cost of conversion lies with the investors.

“Even if IRFC tries to raise funds via domestic market, it would be able to issue bonds at a price close to 8.40% in the current market when the yield is seeing so much volatility,” said a bond arranger.

CAG slams Railways for Rs.2719 Crore excess spending

An excess spending of Rs 1877.09 crore was in revenue grant and another Rs 842.66 crore was in capital grant, taking the total to Rs 2719.75 crore

Railways spent over Rs 2,719 crore more than the authorisation granted to it by Parliament in 2013-14, and used Gross Budgetary Support money to repay debts, in violation of rules, the Comptroller and Auditor General has found in its latest audit, which was tabled in the Parliament on Friday.

“There was an increasing trend after 2011-12 in incurrence of expenditure beyond authorisation given by Parliament, in terms of number of grants and amount,” the government auditor said. An excess spending of Rs 1877.09 crore was in revenue grant and another Rs 842.66 crore was in capital grant, taking the total to Rs 2719.75 crore.

In another report auditing the freight policy, the CAG also pointed at unlawful freight evasion to the tune of Rs 12,722 crore by iron ore transporters, leading to a revenue loss to Railways and the government to the tune of Rs 29,236.77 crore, between 2008 and 2013.

In this report, auditing the Dual Freight Policy of iron ore transportation, wherein iron ore for domestic industries was charged less freight than that transported for export, the CAG has said that a huge number of companies appeared to have been allowed to transport iron ore at domestic rates, when they should have been charged at export rates. It talks about Railways not following its own rules and there were evidences of manual tampering of systems to aid revenue loss and freight evasion.

The report on railway finances reveals that in one capital grant, six revenue grants and one appropriation sought from Parliament, there were savings of more than Rs 100 crore— something which should not have been there. Unveiling the report, CAG officials called it poor budgeting practice.

On top of that, the explanatory note, that would have carried Railways reasons for doing so, could not be tabled in Parliament on Friday along with the CAG reports because Railways submitted the note to CAG only Thursday, whereas they should have submitted it at least a month ago for vetting by auditors, sources said.

In violation of rules, Railways used money received in the form of Gross Budgetary Support from the general exchequer to repay its rolling stock debt raised through its Indian Railway Finance Corporation (IRFC). The money should have gone from its own Capital Fund— money appropriated from revenue surplus. But due to insufficient appropriation in its Capital Fund, Railways made a payment of Rs 12,629.49 crore to IRFC towards the principle component of the borrowings. The government gives GBS to railways to create assets.

IRFC in talks with Bankers to understand Appetite & Pricing in the market for Rupee Offshore Bonds

Mumbai: Indian Railways Finance Corp, the finance arm of Asia’s largest rail network, plans to raise up to $1 billion through offshore rupee bonds, making it the first domestic issuer to eye so-called “masala” debt to diversify its source of funds.

The Reserve Bank of India gave Indian companies the green light to raise bonds offshore in rupees earlier this month, a move seen as a small step towards full rupee convertibility, one of the objectives set by Reserve Bank of India Governor Raghuram Rajan when he took charge in 2013.

Rajan has since said full capital account convertibility, which would allow foreign investors to repatriate money at will, could happen in “a short number of years”.

IRFC plans to use the cash to build and renew infrastructure, and is informally talking to bankers to understand the appetite and pricing in the market for rupee offshore bonds.

“We have a board approval to raise $1 billion from offshore market, but we are yet to decide how much to raise via rupee bond after we see the detailed notification from RBI,” said managing director Rajiv Dutt at IRFC.

IRFC plans to borrow a total of Rs 17,655 crore ($2.81 bn) in 2015-16 from domestic and offshore markets.

“We are trying to diversify our borrower base,” Dutt said, adding that cost will be an important factor to decide on the amount sought offshore in rupees.

Foreign investors’ appetite for Indian corporate bonds has been strong. They currently hold 77.6 percent of the $80 billion limit they are allowed in India.

The RBI’s move to allow the offshore rupee bonds this month follows the success of a “masala” bond issued last year by the International Finance Corporation.

However, views are mixed on the cost advantage, given a 5 percent withholding tax and hedging costs.

“Even a top rated Indian company will be BBB-, which is seven notches below AAA rated company like IFC. So, the cost advantage compared to domestic market will be not great,” said a banker.

IRFC may raise Rs 6,300 Crore via Rupee-denominate Bonds abroad

Mumbai: Indian Railways Finance Corp may become the first domestic entity to sell offshore rupee-denominated bonds after RBI allowed this in its April 7 monetary policy.

The finance wing of the Indian Railways could raise as much as Rs 6,300 crore through such an offer as it seeks to generate the record amount that minister Suresh Prabhu needs to fund his ambitious plans to revamp the ailing network. Other pledges that need to be met include bullet trains and air-conditioned local trains in Mumbai. The institution is discussing such bonds with investment banks, three people aware of the talks told.

Rupee-denominated bonds are seen reducing funding costs at least by 150-200 basis points compared with domestic fund-raising avenues as the exchange-rate risk is shifted to the buyers from sellers. A basis point is 0.01 percentage point.

IRFC Managing Director Rajiv Datt confirmed that it was exploring such a fund-raising plan.

“We are keen to raise rupee-denominated offshore bonds,” he said. “Once RBI guidelines are finalised, we may sell such securities for up to $1 billion allocated for external commercial borrowings (ECBs) this year (FY16).”

The government has mandated a total IRFC borrowing target of Rs 17,655 crore for the fiscal year, an all-time high that’s about 50% higher than the previous year.

This is planned to be raised through a combination of rupeedenominated bonds (through the ECB route), tax-free bonds and domestic corporate bonds. In his railway budget speech, Prabhu had said that about Rs 1.27 lakh crore would be spent on renovating tracks and other safety measures over the next five years. About Rs 7.29 lakh crore will go toward capital expenditure in the same period.

IRFC BOND RATING

IRFC is fully government owned and is therefore treated a quasi-sovereign entity by investors, especially foreign portfolio managers. In the international market, IRFC bonds are at par with India’s sovereign rating of BBB-, the lowest investment grade ranking. Its domestic bonds are rated AAA. IRFC had earlier asked the government for permission to float rupee-denominated bonds overseas.

The instrument allows investors to participate in the Indian bond market without having to register locally.

“The only people who would be interested in this are people who don’t want to come to your country and be registered as FPIs (foreign portfolio investors),” said Hitendra Dave, managing director, head of global markets, HSBC India. “The entire work everything gets exported out.”

IRFC last mopped up $900 million through the ECB route, including $400 million in syndicated loans and $500 million through offshore bonds in FY14. The latter offered the lowest rate in that financial year at 3.917% as investment appetite was quite high, said a person involved in that fund-raising process.

The Asian Development Bank and the International Finance Corporation, the World Bank’s private lending arm, sold rupeedenominated bonds last year for Rs 300 crore and Rs 1,000 crore, respectively.

“These issues have been received with interest. The appetite for rupee debt amongst international investors is a welcome development,” RBI said in its April 7 monetary policy announcement.

“In view of this, it is proposed to expand, in consultation with the government of India, the scope of such bond issues by the international financial institutions as also to permit Indian corporates eligible to raise external commercial borrowing (ECB) through issuance of rupee bonds in overseas centres with an appropriate regulatory framework.”

The railway ministry also intends to fast-track sanctioned works on 7,000 km of double/third/fourth lines and commission 1,200 km in 2015-16 at an investment of Rs.8,686 crore.

Minimise Re-investment Risk through Tax-Free Bonds: Sector Observers

Tax-free bonds are set for a comeback in the next few months, with the government giving a nod to state-owned Indian Railway Finance Corporation and National Highways Authority of India to sell these.

Since the returns of these bonds will be linked to the yield on government securities (G-secs), they are likely to fetch 7-7.25 per cent per annum, lower than the 8.5-9 per cent these offered in 2013-14. Sector observers believe there is likely to be less appetite for such bonds this time from high net worth individuals (HNIs), because of other attractive investment opportunities in equities and long-term bond funds.

Despite lower rates, experts feel these bonds make sense for those in the highest tax bracket. “We are in a declining interest rate scenario and it makes sense to lock-in at these rates for a tenure of 10-20 years. These are ideal instruments for HNIs because of the tax efficiency they offer,” says Ajay Manglunia, head of fixed-income markets at Edelweiss Financial Services.

Beside the coupon rate, investors will also benefit from capital gains if interest rates move south during the next few years. Yields on 10-year government bonds have fallen about 100 basis points, to 7.8 per cent from 8.85 per cent, in the past one year.

At an interest rate of 7-7.25 per cent, the effective pre-tax return for a person in the highest tax bracket works out to be 10.5-11 per cent. “There is no one in the market right now who would pay that kind of a return on AAA-rated paper,” says Dwijendra Srivastava, chief investment officer (CIO), debt, Sundaram MF.

These rates are much higher than post-tax yields from bank fixed deposits (FDs). For instance, the effective post-tax yield for a typical bank FD of one to three years, paying 8.5 per cent per annum, works out to be 5.5 per cent.

There are, however, competing investment options HNIs can look at – fixed maturity plans (FMPs) offered by mutual funds (MFs) and preference shares issued by companies. Investors with a shorter investment horizon can look at three-year FMPs, which offer an indexation benefit and a post tax yield of 7.6-8 per cent. “The returns will be higher than tax-free bonds but if interest rates decline in the coming months, returns in a tax-free bond will be comparable to or better than the debt MF returns, owing to capital gains,” says Umang Papneja, CIO, IIFL Wealth Management.

Preference shares, on the other hand, can be a good choice for investors with a longer time horizon, say experts. Dividend from preference shares are paid annually but the issue size is typically limited to Rs 500-1,500 crore. “Tax-free bonds offer better liquidity than preference shares, and are more tax-efficient when compared to debt MFs if the investment horizon is less than three years,” says Papneja.

The coupon or interest on tax-free bonds is typically paid annually and tax-free. Capital gains on units held for less than a year are added to your income, while gains on units held for more than 12 months are taxed at 10 per cent, or 20 per cent with indexation, whichever is lower.

10-20% bracket

Tax-free bonds might not be ideal for those in the 10-20 per cent tax bracket, say experts. “Someone in the 20 per cent bracket will get about 8.75 per cent taxable equivalent yield, which does not offer a significant spread over a bond or FD available in that tenor with rates of 8.3-8.75 per cent,” says Srivastava.

FDs could make more sense to investors in the 10 per cent tax bracket. For example, the post tax return on an FD offering 8.5 per cent will be around 7.65 per cent for these investors, higher than the yield on tax-free bonds. “Those in the 20 per cent tax bracket can look at five-year tax-free FDs, which can give returns of 8-8.5 per cent, with effective yield working out to about 10.46 per cent, as they are compounded quarterly,” says Srivastava.

However, premature withdrawal in FDs might mean paying a penalty or having to settle for lower interest rates. On Thursday, the Reserve Bank of India allowed banks to offer differential interest rates for deposits above Rs 15 lakh. The rates on premature withdrawal deposits are likely to be lower than normal rates. Tax-free bonds are fairly liquid, as the units are listed on the exchanges.

Besides FDs, those in the 10-20 per cent tax brackets can look at non-convertible debentures, which can fetch post tax returns of anywhere between 7.1 and 8.5 per cent.

According to Manglunia, investors in the 10 and 20 per cent tax bracket can still invest into tax-free bonds, provided they participate for capital gains over the next 12 to 18 months, and not for holding till maturity. Manglunia expects interest rates to decline by 40-50 basis points during the same period, resulting in capital gains of four to five per cent.

There could be another advantage for these investors. Retail applicants investing below Rs 10 lakh in tax-free bonds in the previous issues were offered a 55 bps lesser yield over the G-sec, while HNIs were given a 80 basis points lesser yield. A similar concession might be given for upcoming issues. This means if a 15-year G-sec is quoting at 7.9 per cent, HNIs will get the bonds at 7.1 per cent, while retail investors will get it at 7.35 per cent, resulting in higher capital gains.

IRFC Board approves plan to raise up to $1Bn through Bffshore Bonds

New Delhi: Indian Railway Finance Corporation (IRFC) has received board approval to raise up to $1 billion through offshore bonds, the company told.

This limit will be part of the total borrowing target for IRFC in fiscal year 2016, which is at R17,655 crore. The company has asked the government to permit it to raise the entire borrowing target for FY16 through tax-free bonds.

The company also indicated that it is eagerly looking forward to the option of issuing rupee-denominated bonds in offshore markets.  In FY15, the company had raised close to R11,000 crore, out of which 30-40% was through the bond market route.  IRFC recently raised R1,200 crore through short-tenure bonds at an attractive pricing of 7.95%

IRFC raises Rs.1200 Crore through Short-term Bonds

New Delhi: Indian Railways Finance Corporation (IRFC) — the financing arm of Indian Railways — raised Rs.1,200 crore through issue of short tenure bonds at a tenure of 7.95% on Wednesday, according to bond arrangers. These bonds have a tenure of two years.

“IRFC short-term bond issue has seen a good demand from mutual funds this time. With demand being high, the yields have fallen to sub-8% levels,” said Ashish Jalan, Assistant Vice-President at SPA Securities.

Last month, IRFC source had said the company would target to issue short-tenure bonds at yields of sub-8% levels.

IRFC BondsIRFC had previously issued short-tenure bonds worth Rs.2,625 crore in January at a coupon rate of 7.83%. In March, the company tried to tap the bond market to raise around Rs.3,000 crore, but had stopped the bidding when investors demanded higher yields.

Bond arrangers said bidders were asking for a coupon rate in the rangeof 8.38% to 8.50%, whereas IRFC was planning to issue bonds below 8.27% level.

IRFC’s borrowing target for FY16 is Rs.17,655 crore, according to a source, who had also indicated the company is waiting for the government’s notification on tax-free bonds. “As soon as the government puts a notification, we will like to make use of the limit allotted to us to raise funds through this instrument,” the source had said.

With liquidity being tight in March, investors were cautious on deploying their funds which had led to some hardening of yields.

Recently, HDFC had issued short-tenure bonds worth Rs.200 crore at a coupon rate of 8.45%, according to bond arrangers. National Housing Bank (NHB) had also raised Rs.500 crore through issue of three-year bonds at a coupon rate of 8%.

Bond arrangers indicated that Hinduja Leyland is also planning to raise about Rs.2,000 crore through bond market.

IRFC banks on 3-5 year Bonds to raise up to Rs.4,000 Crore

Mumbai: Indian Railway Finance Corporation (IRFC), the stateowned financier for railway projects, plans to raise up to Rs.4,000 crore by selling bonds with shorter maturities as it aims to reduce borrowing costs by taking advantage of the Reserve Bank of India’s (RBI) falling rate cycle.

A top executive with the railways told that the triple-A rated company may launch the bond issue as early as this week. IRFC may offer 3-5 year maturities, unlike its usual bond sales with 10-15 year maturities, to raise Rs.3,000-4,000 crore, the executive said, on condition of anonymity.

According to market participants, the rates could be fixed in the range of 8.15-8.20%. “There is no point in paying more than 8% rate for 10 years, especially when interest rates are trending downward,” the executive said. “Rather, IRFC can go for shorter maturities below five years and refinance the same periodically at lower rates.”

Issue arrangers may meet the company on Tuesday. In less than two months, RBI has cut the benchmark policy rate by 50 basis points, marking the beginning of the much-expected lower interest rate regime.

IRFC was mandated to raise around Rs.12,000 crore this financial year compared with Rs.14,942 crore a year ago. The company has already collected close to Rs 8,000 crore. In 2015-16, it has targeted to mop up 47% higher funds at Rs.17,655 crore as the Indian Railways proposes to expand operations. The issuer has apparently better asset liability management that allows some leeway to go for relatively short-term borrowings. Its average borrowing duration is about nine years while the average repayments are of the same.

Moreover, it may obtain some equity infusion from the railway ministry to shore up the capital base, market sources said. Unlike other state-owned financiers such as Rural Electrification Corporation, IRFC does not hit the market frequently, but occasionally with a larger size. “IRFC enjoys a premium in the market being a quasisovereign security,” said Shashikant Rathi, head, investments and capital markets, Axis Bank.

IRFC had last raised Rs.2,625 crore in January, offering 2.3 year bonds at 7.83% with 15 months call and put option, which ensures an investment exit route before the maturity.

Short-bond maturities will serve the issuer good on two counts by helping it bring down borrowing costs in a softening interest rate cycle, as the company can always refinance its funds needs periodically. It will also attract FII investments at finer rates due to their bulk buying, dealers said.

Centre’s nod for sale of Tax-free Bonds to individuals in Railway Sector to cut borrowing costs

India plans to spend about Rs8.5 trillion upgrading its antiquated rail network, over the next five years, as it seeks to support economic expansion as fast as 8.5% next year

India’s decision to allow tax-free bonds after a 12-month hiatus should cut borrowing costs for a $1 trillion development push.

Finance minister Arun Jaitley said in his budget speech last month that tax-free bond sales to individuals for rail, road and irrigation projects will be permitted from 1 April.  While issuance wasn’t banned as such this fiscal year, offerings halted because no quotas were allocated.

India plans to spend about Rs.8.5 trillion upgrading its antiquated rail network over the next five years, budget documents released in New Delhi show, as it seeks to support economic expansion as fast as 8.5% next year. A second international airport for Mumbai is in the works, as is a dedicated rail transport corridor for freight between Delhi and Mumbai, the nation’s two largest cities. “Tax-free bonds will reduce the cost of borrowing for issuers and will have a multiplier effect on job creation,” Indian Railway Finance Corp. Managing Director Rajiv Datt said by phone on 2 March. “We can raise funds from the bond market at lower rates and longer tenors than borrowing through bank loans.”

Tax-free quotas Spending on infrastructure will increase by Rs.70,000 crore in the coming fiscal year, Jaitley said, part of a $1 trillion plan to improve India’s highways, harbors and power plants between 2012 and 2017.

Prime Minister Narendra Modi’s government forecast a wider budget deficit than projected on 28 February and said better infrastructure will be key to achieving growth of 8% to 8.5% in the coming fiscal year.

IRFC, the funding unit of Asia’s oldest rail network, had a tax-free bond sale quota of Rs.10,000 crore in the 12 months ended 31 March 2014. State-owned companies raised at least Rs.40,000 crore via tax-exempt debt that year, when the government of former Prime Minister Manmohan Singh set a quota for companies of Rs.50,000 crore.

India is ranked 87 out of 144 nations by the World Economic Forum (WEF) for infrastructure quality, below war torn Ukraine and 25 spots below Kazakhstan, which has roughly the same land mass.

Lower coupons “The government’s thrust is on building infrastructure and it wants to raise money through all possible avenues,” said Vibha Batra, the New Delhi-based head of financial industry ratings at ICRA Ltd, the local unit of Moody’s Investors Service. “A gap of more than a year will surely result in strong investor demand.” Other measures have been introduced to help spur infrastructure spending too.

The Reserve Bank of India (RBI) eased rules for banks in July to make it easier to sell longer-dated debt whose proceeds will be used for affordable housing. The central bank also exempted bank bonds maturing in seven years or more from reserve requirements so long as sale proceeds are for highways, harbors and power plants.

IRFC last sold tax-free notes in February last year. It paid an 8.19% coupon for the notes due March 2024, versus a weighted average fixed coupon on all its rupee-denominated debt of 8.33%, according to data compiled by Bloomberg.

NTPC Ltd, which operates power plants that supply state electricity boards, also sold tax-free notes in February 2014, raising Rs.500 crore via a three-part sale. It’s also paying an 8.19% coupon for 10-year debt, 98 basis points less than similar maturity securities it sold in September.

Positive impact

Other issuers of tax-free bonds have included Cochin Shipyard Ltd, a boat builder in India’s south, New Delhi-based Housing and Urban Development Corp., which helps finance urban infrastructure projects, expressway builder National Highways Authority of India, and Rural Electrification Corp., which funds power projects. “The entire funding cycle will be positively impacted because of tax-free bonds,” Rural Electrification Director (Finance) Ajeet Agarwal said on 5 March. “Projects will benefit from lower borrowing costs.” Yields on top-rated 10-year corporate bonds have fallen 23 basis points this year to 8.36%, Bloomberg-compiled data show.

The rupee has appreciated 1.4% against the dollar, Asia’s best-performing currency after the Thai baht.

Bullet Train

While India’s infrastructure has improved over the past decade, more work is needed. Modi unveiled plans in July last year for a high-speed bullet train between Mumbai and Ahmedabad, a main city in the neighbouring state of Gujarat. Bigger airport terminals for New Delhi and Mumbai have already been completed, as has an upgraded highway between Delhi and Agra, home to the Taj Mahal. Borrowing costs should drop further after the RBI eased last week, Rural Electrification’s Agarwal said. RBI governor Raghuram Rajan unexpectedly reduced the repo rate by 25 basis points to 7.5% on 4 March in the bank’s second reduction this year. “Tax-free bonds are attractive instruments for issuers as well as investors, and also help the government to bridge the funding gap,” said Ajay Manglunia, the Mumbai-based head of fixed-income markets at Edelweiss Financial Services Ltd. “I expect the government to allow issuance of Rs.30,000 crore to Rs.40,000 crore of untaxed bonds next fiscal year.”

GBS for Railways pegged up to Rs.40000 Crore – an increase of Rs.10000 Crore over last fiscal

New Delhi: The Gross Budgetary Support (GBS) for the railways has been pegged at Rs.40,000 crore, an increase of Rs 10,000 crore over the last fiscal.

The increased allocation of GBS is 41.6 per cent of the total plan outlay Rs.1,00,011 crores in 2015-16 financial year.

During the period, the railways proposes to raise Rs.17,793 crore from internal resources and Rs 1645 crore from diesel cess.

The national transporter proposes to raise another Rs.17,000 crore from Indian Railway Financial Corporation (IRFC) and Rs.6000 crore from PPP models.

The rest of the amount will be met through support from multi-national agencies like World Bank, ADB, and corporations like LIC which have shown interest in the railways, said Railway Board Chairman A K Mital.

The Rail Budget has set a target of achieving of an operating ratio of 88.5 per cent which Railway Minister Suresh Prabhu in his budget speech described as best ever in the last nine years.

Operating ratio was targeted to be 92.5 per cent in 2014-15.

Significantly, the railways has earmarked Rs 18,000 crore from Rs.4000 crore allotted during the last fiscal for capacity expansion like doubling and trippling of the rail network to decongest the trunk routes.

The budget has proposed to cover 9,400 km of doubling/ tripling/quadrupling works proposed will attract more investments in the sector and refuel growth, thereby pushing it into higher trajectory.

IRFC Net Profit up 19.54% to Rs.421.73 Cr in H1-FY15

नई दिल्ली New Delhi: Indian Railway Finance Corporation Ltd (IRFC) today posted a 19.54 per cent rise in its net profit at Rs 421.73 crore for the six-month period ended September 30, 2014.

IRFC, the financing arm of the Indian railways, had posted a net profit of Rs 352.79 crore during the same period last year.

The rise in net profit is mainly attributed to the growth in lease income which stood at Rs 3,141.34 crore as against Rs 2,856.90 in the year-ago period.

Interest on deposit from banks also increased to Rs 204.18 crore as against Rs 11.07 crore earned during the same period last year.

The company had posted a net profit of Rs 700.69 crore for the year ended March 31, 2014.

Govt looking at stake sale in Rail PSUs: IRCTC, RailTel, RITES, IRCON, IRFC in the list

नयी दिल्ली New Delhi:  The government is planning to offload its stake in certain profit-making infrastructure companies of Indian Railways, a move that will help such companies to get listed on stock exchanges as well as raise funds for exchequer.

“We are in talks with the Railway Board for sale of government equity in certain PSUs managed by Indian Railways, a source told.

There are about half a dozen companies which are managed by Indian Railways.

These include RITES, IRCON, IRFC, IRCTC, and RailTel Corporation of India Ltd. Since these companies are not listed it is likely that the initial public offer (IPO) will be accompanied by government offloading its stake. Indian Railways, which is facing cash crunch, is looking at various ways to mobilise resources for undertaking its expansion programme.

Government has already pitched for reforms in Railways by proposing Foreign Direct Investment and Public Private Partnership (PPP) to meet the resource crunch.

“The disinvestment will be a part of the government exercise to engage private players in ancillary services as part of overall agenda,” the source added.

The Finance Ministry plans to raise Rs 43,425 crore through disinvestment in PSUs in the current fiscal.

A host of companies have been lined up by the disinvestment department as candidates for stake sale.  These include SAIL, NHPC, ONGC, REC and PFC.

Railways obligatory Lease Rental payments to IRFC exceeds its fresh market borrowings

Railways to now pay more than it will get from IRFC. Considering that this year only a pittance would be added, it is evident that it would be starved for two years in a row.

नयी दिल्ली New Delhi:  Indian Railways’ (IR) obligatory lease rental payments to the Indian Railway Finance Corporation (IRFC) will, for the first time, exceed the national transporter’s fresh market borrowings this fiscal, reflecting its heavy indebtedness.

As rental obligations to IRFC for FY15 mounted to about Rs.13,000 crore, railways minister Sadananda Gowda chose to reduce fresh borrowings in the year to Rs.11,790 crore from Rs.13,800 crore assumed in the interim budget presented by the UPA government in February.

This means that excluding the principal component of the rentals to be paid this year, estimated at Rs.5,467 crore, only measly sums will be added to the railways’ key investment funds this fiscal, which have anyway been grossly under-provided by the cash-trapped transporter for several previous years.

IRFCThe capital fund will get just around Rs.200 crore (the Rs.5,663 crore shown in Budget papers includes principal payments to IRFC, a top railway official confirmed) and the development fund, some Rs.300 crore. Reckoning principal rentals to IRFC as capital spending is justified by the railways, saying that the borrowed funds are used to create rolling stock (wagons, coaches and locomotives), although analysts say these are by no means the capacity expansion that the capital fund is actually meant for.

Even the newly created debt service fund, to which a handsome Rs.5,268 crore was appropriated last fiscal has been starved by Gowda with a paltry contribution of Rs.101 crore. The fund was created to service emerging repayment obligations regarding the JICA and World Bank loans for the dedicated freight corridors and the burden of 7th Pay Commission.

Railway finance commissioner Rashmi Kapoor justified this, saying that these debt service obligations would become substantial only over the next few years (although interest liability has already started), and it was more important to reduce the IRFC burden, which is immediate.

Although Rail Budget FY14 envisaged appropriation of Rs.5,434 crore to the capital fund, nothing was actually added to the fund in the fiscal, as per the revised estimate.

Considering that this year only a pittance would be added, it is evident that it would be starved for two years in a row. In FY14, about Rs 3,000 crore was withdrawn from the fund for “capital works”, although sources in the rail ministry said the amount was not actually used for capacity expansion projects.

Gowda’s budget papers show the transporter will have an excess (of receipts over expenditure after payment of dividend to government or the interest on budget support) of Rs 6,064 crore whereas in his budget speech the minister put the “surplus” at Rs.602 crore. “The surplus, after paying obligatory dividend (and lease charges (from net revenue of Rs.15,199 crore), was Rs 11,754 crore in 2007-08 and is estimated to be Rs 602 crore in the current financial year,” he had said. The minister’s speech, needless to say, was more realistic about the railways’ finances than the budget papers. (The dividend to the government or the interest paid on budgetary capital is pegged at Rs 9,135 crore and the lease charges (principal), as mentioned above, at Rs 5,467 crore).

Out of the railways’ total Plan outlay of Rs 4.47 lakh crore between 1996-97 and 2013-14, Rs 1.07 lakh crore or 24% was financed through market borrowings by IRFC.

IR relies on IRFC to fund acquisition of rolling stock. IRFC borrows from the market, keeps ownership of major chunk of IR’s rolling stock assets in the 30-year lease period, in the first half of which it recovers the entire rental charges (principal and interest). After the 30-year period, the assets are transferred to railways virtually free.

“We are repaying IRFC more than what we are borrowing because we don’t want to increase our debt burden. That’s the reason we have cut the borrowing for this year,” Railway Board chairman Arunendra Kumar told.

The share of rolling stock assets funded by IRFC as a percentage of the total rolling stock assets in operation has gone up from 36-37% in 1999-2000 to about 60% currently.

Sonia Gandhi loses Tax-free Railway Bonds worth Rs.10 Lakh

नयी दिल्ली New Delhi: At the peak of election season you would not expect Sonia Gandhi’s name to appear in a small advertisement buried in the corner of a business newspaper.

But just like an aam aadmi, the Congress party boss’ name figures in an advertisement issued by Indian Railway Finance Corporation (IRFC), the railway PSU involved in its borrowing programme, regarding tax-free bonds of Rs 10 lakh that have been “reported lost”.

Gandhi owns 1000 bonds each with a face value of Rs 1,000 and offering a fixed return. The bonds, which have been misplaced, were part of the 86th A Series Tax Free Bonds, IRFC said.

The bonds, which were issued to raise loans for IRFC, are part of Gandhi’s affidavit that puts assets belonging to her at Rs 2.8 crore. The largest chunk of her assets is in mutual funds (Rs 82 lakh), followed by over Rs 66 lakh in bank deposits and FDs and Rs 42 lakh in her public provident fund (PPF) account. The affidavit mentions that the bonds were issued in February 2013.

The advertisement is part of routine procedure followed for anyone who misplaces a bonds. The rule requires the investor to approach the company which had issued the certificate and submit an indemnity bond. The company then issues an ad notifying others that if they have a claim they should raise it with the company. In this case, IRFC has given 15 days to people to raise any claims “with documentary evidence at the very outset”.

Such public announcements are required to be made by the issuer of bonds or securities in case of the investor reporting their loss.

As per her affidavit, the Congress President has movable assets worth Rs 2.81 crore and immovable assets to the tune of Rs 6.47 crore.

Among the movable assets, Gandhi has Rs 85,000 in cash, Rs 66 lakh in banks, Rs 10 lakh worth bonds and shares worth Rs 1.90 lakh.

IRFC extends closing date for tax-free bonds

New Delhi: The Indian Railway Finance Corporation (IRFC) on Friday said it is extending the closing date for its public issue of tax-free bonds to March 14. IRFC is seeking to raise Rs.2916.87 crore through the issue, which was supposed to close on Friday. “We wanted the entire issue to be subscribed; hence, we have extended the date of closing,” said DC Arya, director of finance, IRFC.

Arya said investor demand was diverted to National Housing Bank’s (NHB) second tranche of tax-free bonds, which offers a higher coupon rate. NHB’s public issue of tax-free bonds worth Rs 1,000 crore offers a maximum coupon rate of 8.93% for a tenure of 15 years, while IRFC’s bond issue offers a maximum coupon rate 8.88% for a 15-year tenure. At the end of Friday’s close, NHB’s public issue had received bids worth Rs.1,251 crore while IRFC’s issue got bids worth Rs.774.65 crore.

Rural Electrification Corporation (REC), National Thermal Power Corporation (NTPC) and NHB were, earlier in the month, allowed to increase the shelf limits on their tax-free bond issues. While REC and NHB came out with a second public issue of tax-free bonds worth Rs.1000 crore each, NTPC raised Rs.500 crore via private placement.

In 2013-14, tax-free bonds saw a much better performance than the tepid demand seen last year as interest rates being offered are higher. This is partly because government bonds have risen sharply during the course of the year. The 10-year benchmark yield closed at 8.813% as on Friday.

Investors are also looking at tax-free bonds as an attractive long-term investment as there were media reports that suggested that they would be discontinued by the government. Finance Minister P.Chidambaram did not allot tax-free bonds for state-owned companies in his interim budget speech earlier this month.

RPT-Fitch rates Indian Railway Finance Corporation’s USD Notes Final ‘BBB-‘

Fitch Ratings has assigned Indian Railway Finance Corporation’s (IRFC) USD500m 3.917% senior unsecured notes due 2019 a final rating of ‘BBB-‘. The rating is aligned with IRFC’s Long-Term Issuer Default Rating (IDR) of ‘BBB-‘, which has a stable outlook.

The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 13 January 2014.

KEY RATING DRIVERS

IRFC’s ratings reflect the entity’s public sector status, government ownership and strong operational and strategic ties with the government of India, resulting in a strong likelihood of extraordinary government support if needed. As such, IRFC has been classified as a dependent public sector entity under Fitch’s criteria and the ratings are credit linked to that of the sovereign.

The ratings derive strength from the Ministry of Railways’ ongoing support as evidenced by regular equity injections into IRFC since its formation. IRFC’s debt/equity ratio has been largely inside the 10x limit in the past three years. Fitch expects further capital injections from the Ministry of Railways if this ratio were to exceed the limit. The ministry injected INR7.5bn and INR6bn in FY12 and FY13, respectively.

IRFC is the sole financing arm of the Ministry of Railways and is mainly involved in providing finance leases to rolling stocks including locomotives, passenger coaches, and freight wagons among others. Fitch expects IRFC’s collaboration with the government to persist.

IRFC is wholly owned by the government and the board of directors is appointed by the government. The Ministry of Railways signs a memorandum of understanding with IRFC every year to set its operational and financial performance targets, which it reviews on a quarterly basis.

The Comptroller and Auditor General of India appoint IRFC’s auditors on an annual basis, enhancing government control.

It has been agreed with IRFC that the Ministry of Railways will cover any shortfall, by making advance payments of lease rentals, if IRFC does not have sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects future standard lease agreements to continue to contain a similar assurance and the ministry to provide funding to prevent liquidity mismatches that may lead to an IRFC default.

IRFC’s profitability is resilient and highly visible because its interest income is charged on a cost mark-up basis and the capital investment pipeline of the Indian railway sector is strong. Its assets and liabilities are closely matched. With a sound reputation in capital market, Fitch expects IRFC to be able to easily access domestic capital markets and banks for low-cost long-term funding.

IRFC was incorporated to raise funds from debt capital markets to finance the acquisition of new rolling stock to meet the developmental needs of the Indian railway system administered by the Ministry of Railways. Established in 1986, IRFC is registered as a notified public financial institution under the Companies Act, 1956 and as a non-banking finance company and asset finance company under the Reserve Bank of India (RBI) Act, 1934.

RATING SENSITIVITIES

A positive rating action would stem from a similar change in the ratings of the Indian sovereign in conjunction with continued strong support from the government.

Significant changes to its strategic importance and financing arm status to the Ministry of Railways or a dilution in the government’s shareholding to less than 51% could result in the entity no longer being classified as a dependent public sector entity and therefore no longer being credit- linked to the sovereign rating.

IRFC Overseas Bond issue subscribed six times

Mumbai:  Indian Railway Finance Corporation has raised $500 million or about Rs.3,100 crore through privately placed bonds with institutional investors in US, Europe and Asia. They are offering a coupon of 3.917% for five-year maturity.

“The issue was fully subscribed on Wednesday itself,” a senior IRFC official told on conditions of anonymity. “We will buy currency hedge over a period of time but not today itself. Rupee should be more stable after the general election. We stand to gain in case of any rupee appreciation.”

Bonds can be traded in the secondary market and will be listed in the Singapore Stock Exchange. The coupon has been derived at after adding 245 basis points over and above the five-year US Treasury bill which was trading at about 1.47%.

The company has headroom to raise $1,000 million or 1 billion under the external commercial borrowing route as mandated by the government. Earlier in December, 2013; the company had raised $400 million. These bonds do not have any call or put option. IRFC will repay its liability at a fixed rate in bullet mode that is in one-shot at the end of five years.

Three rating companies namely Moody’s, S&P and Fitch have rated the issuance with Baa3, BBB- and BBB- grades respectively. These offshore bonds are called Regulation S where they may not be necessarily offered and sold within US.

ANZ, Barclays, Deutsche Bank and The Royal Bank of Scotland are some of the investment bankers for the issue and were the book running lead managers. Listing of the bonds will be on Singapore’s SGX exchange.  Majority of subscription has come from fund managers while banks and insurance players too have invested.

“The issue evinced good amount of interest among investors. We received an order book for $3 billion. We rejected the rest above the issue limit,” said an investment banker who did not wish to be identified.

Railways to Borrow ₹13,800 Crore in 2014-15 from IRFC and RVNL

New Delhi:  Indian Railways will borrow less at ₹13,800 crore from market through its two companies IRFC and Rail Vikas Nigam Ltd for capital expenditure during 2014-15.

In the current fiscal, as per the revised estimate, these two companies raised ₹14,942 crore from markets.

Indian Railways Finance Corporation (IRFC) will raise ₹12,800 crore in 2014-14 for investment in rolling stock and projects, the Railway Budget document tabled in Parliament today said.

Besides, the other financial firm under Indian Railway, Rail Vikas Nigam Ltd (RVNL), plans to raise ₹1,000 crore through market borrowing.

In the current fiscal, IRFC raised ₹14,838 crore while RVNL mopped up ₹104 crore from the market.

Besides, Railways expects to mobilise ₹6,005 crore through the Public Private Partnership (PPP) route during 2014-15.

“Extra Budgetary Resources, including market borrowings through IRFC, ‘PPP’ and other schemes, has been pegged at ₹19,805 crore,” Railways Minister Mallikarjun Kharge said in his proposals while presenting the Interim Rail Budget.

“While efforts of the government to provide precious financial resources for growth of Indian Railways would undoubtedly continue, the phenomenal investment needs of rail infrastructure cannot be met entirely through Gross Budgetary Support, Internal Generation of Railways and Market Borrowing.

“Railways have therefore started targeting private investment in rail infrastructure to bridge the gap,” he said.

Fund-raising arm of Indian Railways, ‘IRFC’ to launch another Tax-free Bond issue

New Delhi:  Indian Railways Finance Corporation (IRFC) is set to hit the market again with a public issue of tax-free bonds in the current fiscal.

“We are coming up with a public issue before March 31. We will raise the remaining amount from the tax-free bonds,” told Rajiv Datt, Managing Director, IRFC.

The firm has not yet fixed the exact date for the issue. The returns that investors can get in the next issue will be decided closer to when the issue hits the market, said Datt. Though IRFC raised more funds than the issue size in the recent tax-free bond issue that closed two days ago, it could not fill the entire green shoe option.

Through the public issue that closed on February 7, IRFC raised about ₹4,200 crore, said Datt. The issue size was ₹1,500 crore with a green shoe option and had a window to mobilise over ₹4,400 crore through the tax-free bond route.

In late 2013, IRFC had raised ₹1,337 crore via the tax-free window through private placement. The firm declined to comment on the $600 million (about ₹3,600 crore) that it is in the process of raising through external commercial borrowings.

In the current fiscal ending March 31, IRFC aims to raise ₹15,000 crore.

Money raised by IRFC is used to buy locomotives, wagons and coaches for Indian Railways, which pays it back from the revenues it earns by moving cargo and passengers.

A small share of IRFC funds is also routed to financing bankable projects of the Railways. In 2012-13, IRFC funds were used to acquire 581 locomotives, 1,958 coaches and 14,801 wagons.

The borrowing costs of IRFC in 2012-13 stood at 8.12 per cent, which was 0.98 per cent lower than the average borrowing cost of all AAA rated entities in India put together.

On a cumulative basis, till 2012-13, IRFC has borrowed over ₹1-lakh crore for the Railways market, which has funded procurement of 6,654 locomotives, 38,571 coaches and 1.77 lakh wagons.

IRFC, IREDA Tax-free Bonds closing date extended

Indian Railways Finance Corporation (IRFC) extended the closing date of its tax-free bond issue to 7th February. The struggle to raise subscriptions for AAA rated bonds of IRFC could be due to its big issue size of Rs8,663 crore, lower coupon rates than those offered by recent offers as well as the fact that IRFC had already raised money in the previous financial year. Investors rushed to small-size tax-free bond issues of NTPC, NHPC, NHB and NHAI; these were oversubscribed within a few days. It also means that investors are not swayed by just the ratings; there is a need for diversification. IRFC did not have the 20-year investment option which was available for the tax-free bonds of NTPC, NHPC and NHB.

NHAI offered retail investors 8.52% and 8.75% for bond with maturity of 10 and 15 years, while IRFC is offering 8.48% and 8.65% for bonds with tenure 10 and 15 years, respectively. Indian Renewable Energy Development Agency (IREDA) is planning to raise Rs1,000 crore through the issue of tax-free bonds for financing its renewable energy and energy-efficiency projects and to augment the company’s resource base. The bonds are rated AAA by CARE and Brickworks.

Railway PSUs hand over dividends worth Rs.505 Crore

New Delhi: Railway Minister Mallikarjun Kharge received cheques amounting to a total of Rs.505.31 crore as dividend for the year 2012-13 from the seven public sector undertakings functioning under his ministry.

In 2011-12, the total dividend paid by these seven PSUs was Rs.405.78 crore.

“Despite the slowdown, Railway PSUs have performed well and are paying approximately 25 per cent more dividend in 2012-13 as compared to the previous year,” a senior rail ministry official said.

The heads of all seven PSUs – Container Corporation of India Ltd (CONCOR), IRCON International Ltd, RailTel Corporation of India Ltd (RCIL), RITES, Rail Vikas Nigam Ltd (RVNL), Indian Railways Catering and Tourism Corporation (IRCTC) and Indian Railway Finance Corporation (IRFC) – met Kharge and personally presented the cheques.

Besides Kharge, all Railway Board members were present during the meeting.

The maximum dividend was paid by IRCON Chairman-cum- Managing Director, Mohan Tiwari, who handed over a cheque of Rs.148.06 crore. He was followed by Concor CMD Anil K Gupta, who gave the minister a cheque for Rs.143.48 crore.

The cheque for the lowest amount was from IRCTC, which returned a dividend of Rs.11.77 crore.

IRFC MD Rajiv Dutt presented a cheque for Rs.110 crore while the RITES cheque, presented by CMD RK Mehrotra, amounted to Rs.50 crore, RVNL CMD Satish Agnihotri handed over a cheque for Rs 27 crore while RK Bahuguna of RCIL gave a cheque for Rs 15 crore.

Closing Date for IRFC Tax-Free Bonds extended till Feb 7

Indian Railways Finance Corporation has extended its Rs 8,600-crore tax-free bond offering, after failing to garner adequate subscription. According to the earlier schedule, the issue was to close on Monday. Now, it has been extended till February 7.  IRFC has raised about Rs 2,300 crore, against the total issue size of Rs 8,660 crore, including an option to subscribe bonds worth an additional Rs 7,163 crore.  The initial subscription was for Rs 1,500 crore.  Meanwhile, National Highways Authority of India’s tax-free bond issue, opened more than a week after the IRFC one, has been fully subscribed, according to provisional figures, primarily due to a relatively attractive coupon rate. The coupon rate offered by NHAI is 8.27 per cent and 8.5 per cent for bonds with tenures of 10 years and 15 years, respectively, while that offered by IRFC is 8.22 per cent and 8.4 per cent for bonds with the same tenures. The coupon rate offered to retail investors — those investing up to Rs 10 lakh — is 25 basis points higher.  “Both NHAI and IRFC are not offering the best rates they were allowed to offer. However, the rates offered by NHAI are slightly more attractive and, therefore, the issue has been lapped up first,” said an investment banker.

IRFC gets international rating for USD Benchmark Senior Unsecured Notes

Fitch Ratings has assigned Indian Railway Finance Corporation’s (IRFC) proposed US dollar notes an expected rating of ‘BBB-(EXP)’. The rating is aligned with IRFC’s Long-Term Issuer Default Rating (IDR) of ‘BBB-‘, which has a Stable Outlook.

The final rating on the notes issue is contingent upon the receipt of final documents conforming to information already received.

Fitch Group is a global leader in financial information services with operations in more than 30 countries. In addition to Fitch Ratings, the group includes Fitch Solutions, an industry-leading provider of credit risk products and services, and Fitch Learning, a preeminent training and professional development firm. Fitch Group is jointly owned by Paris-based Fimalac, S.A. and New York-based Hearst Corporation.

KEY RATING DRIVERS

IRFC’s ratings reflect the entity’s public sector status, government ownership and strong operational and strategic ties with the government of India, resulting in a strong likelihood of extraordinary government support if needed.

As such, IRFC has been classified as a dependent public sector entity under Fitch’s criteria and the ratings are credit linked to that of the sovereign.

The ratings derive strength from the Ministry of Railways’ ongoing support as evidenced by regular equity injections into IRFC since its formation. IRFC’s debt/equity ratio has been close to the regulatory 10x limit in the past three years. Fitch expects further capital injections from the Ministry of Railways if this ratio were to exceed the limit. The ministry injected INR7.5bn and INR6bn in FY12 and FY13, respectively.

IRFC is the sole financing arm of the Ministry of Railways and is mainly involved in providing finance leases to rolling stocks including locomotives, passenger coaches, and freight wagons among others. Fitch expects IRFC’s collaboration with the government to persist.

IRFC is wholly owned by the government and the board of directors is appointed by the government. The Ministry of Railways signs a memorandum of understanding with IRFC every year to set its operational and financial performance targets, which it reviews on a quarterly basis. The Comptroller and Auditor General of India appoint IRFC’s auditors on an annual basis, enhancing government control.

It has been agreed with IRFC that the Ministry of Railways will cover any shortfall, by making advance payments of lease rentals, if IRFC does not have sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects future standard lease agreements to continue to contain a similar assurance and the ministry to provide funding to prevent liquidity mismatches that may lead to an IRFC default.

IRFC’s profitability is resilient and highly visible because its interest income is charged on a cost mark-up basis and the capital investment pipeline of the Indian railway sector is strong. Its assets and liabilities are closely matched. With a sound reputation in capital market, Fitch expects IRFC to be able to easily access domestic capital markets and banks for low-cost long-term funding.

RATING SENSITIVITIES

A positive rating action would stem from a similar change in the ratings of the Indian sovereign in conjunction with continued strong support from the government.

Significant changes to its strategic importance and financing arm status to the Ministry of Railways or a dilution in the government’s shareholding to less than 51% could result in the entity no longer being classified as a dependent public sector entity and therefore no longer being credit- linked to the sovereign rating.

IRFC was incorporated to raise funds from debt capital markets to finance the acquisition of new rolling stock to meet the developmental needs of the Indian railway system administered by the Ministry of Railways. Established in 1986, IRFC is registered as a notified public financial institution under the Companies Act, 1956 and as a non-banking finance company and asset finance company under the Reserve Bank of India (RBI) Act, 1934.

Contact: Primary Analyst Terry Gao Associate Director +852 2263 9972 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Fernando Mayorga Managing Director +34 93 323 8407 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com.”

Moody’s Investors Service assigns ‘BBB-‘ rating to IRFC

Likewise, Moody’s Investors Service has assigned a Baa3 rating to the proposed USD benchmark senior unsecured notes to be issued by Indian Railway Finance Corporation (IRFC, Baa3). The rating outlook is stable.

The proposed notes are expected to have a 5-year maturity and will be listed on the Singapore Stock Exchange.

The net proceeds of the issue will be used to finance the purchases of rolling stock such as locomotives and wagons, which will be leased to India’s Ministry of Railways.

The Baa3 rating is derived from IRFC’s Baa3 long-term foreign currency issuer rating, as the notes will constitute the senior unsecured obligations of IRFC and will rank pari passu among themselves and equally with the company’s other senior debt.

Consequently, the notes are rated at the same level as IRFC’s foreign currency issuer rating, which in turn shares the same rating as the Government of India’s (Baa3, stable) foreign currency bond rating.

The rating outlook for the proposed notes is in line with the rating outlook on India’s sovereign debt.

IRFC’s rating is derived primarily from the company’s close linkage to the government, as it is the exclusive borrowing arm of the Ministry of Railway. IRFC raises funds for capital investment in India’s railway infrastructure, which it then leases to the ministry.

The company operates under the administrative control of MOR, and although it legally owns nearly 60% of the rolling stock fleet used on India’s government-owned railways system, the ministry retains the purchasing authority for such assets, as well as the responsibility for the operation and maintenance of the rolling stock. The ministry’s responsibility includes complete liability for accidents, injuries, and other related issues.

We have determined that the IRFC’s credit profile is inseparable from the government’s own credit profile, given the control exercised by MOR over both IRFC and its assets. Government policies and the level of support provided by the ministry are, therefore, the main factors determining IRFC’s funding costs, the growth in its profitability and, ultimately, its overall credit quality.

The rating also reflects the company’s strong capitalization, consistent track record of profitability, impeccable asset quality, and the challenges emanating from its dependence on wholesale funding.

S&P assigns ‘BBB-‘ rating to IRFC

Standard & Poor’s Ratings Services today assigned its ‘BBB-‘ foreign currency issue rating to a proposed issue of U.S.-dollar-denominated senior unsecured notes by Indian Railway Finance Corp. The rating on the notes reflects the long-term counterparty credit rating on IRFC and is subject to our review of the final issuance documentation.

In line with its main policy mandate, IRFC intends to use the notes proceeds to acquire rolling stock, which the company will lease to the ministry of railways. The proposed notes will constitute direct, unconditional, unsecured, and unsubordinated obligations of IRFC. They shall at all times rank at par among themselves and with all other unsecured and unsubordinated obligations of the company.

The long-term issuer credit rating on IRFC is equalized with the sovereign credit rating on India to reflect Standard & Poor’s opinion of an ”almost certain” likelihood of timely and sufficient extraordinary government support to IRFC in the event of financial distress. In accordance with our criteria for government-related entities, our rating approach is based on our view of IRFC’s ”critical” role as the financing arm of the state-owned Indian Railways and ”integral” link with its sole owner, the government of India.

The rating on IRFC incorporates strong direct government support in the form of capital injections, permission to issue tax-free bonds, and arrangements to fund debt-payment shortfalls or emergencies.

IRFC to pick up $500mn with option to retain $100mn oversubscription – raise $600mn from Overseas Bonds

New Delhi:  The Indian Railways Finance Corp (IRFC), which is looking to raise $600 million later this month, will be the first company to go for an overseas bond issue in 2014.

IRFC hopes to pick up $500 million with an option to retain an oversubscription of $100 million, DC Arya, Director (Finance), IRFC, said. Arya told FE that the coupon rate will be decided soon. “We are looking to list the issue in Singapore and plan to hold road shows sometime in the second week” he added. Indian companies raised close to $12 billion in dollar-denominated bonds last year, 750 million in euro-bonds and SGD 1.27 billion in Singapore dollar bonds. Bharti Airtel and ICICI Bank were the last two companies that mopped up overseas money last year. Bharti Airtel picked up 500 million euros, in its second issue of the year, while ICICI Bank raised $750 million. The year 2013 saw 24 overseas issues, of which the Vedanta Resources’ issue for $1.7 billion in May was the largest followed by that of Bharti Airtel and State Bank of India (SBI) at $1.2 billion and $1 billion.

Overseas bond sales in India set a record in 2013, as issuers rushed offerings before the US Fed started its taper of monetary stimulus and the quarter saw the biggest drop in dollar borrowing costs.

Data compiled by Bloomberg showed that Indian companies have sold $14.4 billion of international notes since December 31, 2012, 47% more than all of 2012 and the most since Bloomberg began compiling the data in 1999. Average dollar yields have fallen 25 bps to 5.7% this quarter, the most since the three months ended December 31, 2012.

IRFC to raise Rs.8660 Crore through Tax Free Bonds

SBI Capital Markets, A K Capital Services, Axis Capital, ICICI Securities and Kotak Mahindra Capital Company are the lead managers

Mumbai: Indian Railway Finance Corp (IRFC) – a Ministry of Railways PSU will hit the market on January 6 to raise more than Rs 8,660 crore through tax-free bonds.

The issue of tax-free and secured non-convertible bonds, worth around Rs 8,663 crore, will close on January 20, IRFC said in the prospectus filed with market regulator Sebi.

“Public Issue by Indian Railway Finance Corporation of tax free, secured, redeemable, non-convertible bonds of face value of Rs 1,000 each in the nature of debentures having tax benefits…for an amount of Rs.1,50,000 lakhs with an option to retain over-subscription up to Rs 7,16,300 lakh aggregating to Rs 8,66,300 lakhs in the fiscal 2014,” the company said.

The funds raised through this issue will be utilised by IRFC towards financing the acquisition of rolling stock which will be leased to the Ministry of Railways in line with present business activities.

IRFC is a dedicated financing arm of the Ministry of Railways. Its sole objective is to raise money from the market to part finance the plan outlay of Indian Railways.

While Karvy Computershare is the registrar to the issue, SBI Capital Markets, A K Capital Services, Axis Capital, ICICI Securities and Kotak Mahindra Capital Company are the lead managers to the issue.

IRFC Tax-Free Bonds issue opens on Jan 6

New Delhi:  Indian Railway Finance Corporation (IRFC) will hit the market with the public issue of its tax-free bonds on January 6.

Simultaneously, IRFC will also access the external market to raise $600 million.

“The bond issue will be open for two weeks starting January 6,” Rajiv Datt, Managing Director, IRFC, told. The issue size will be Rs 1,500 crore, with a green shoe option, which will basically allow IRFC to raise more funds in case of oversubscription.

IRFC, which has the Finance Ministry’s nod to mobilise Rs 10,000 crore through tax-free bonds, can raise up to Rs 8,650 crore now. It has already raised about Rs 1,340 crore through private placement route.

The coupon rates are 8.23 per cent for 10-year bonds and 8.4 per cent for 15-year bonds for institutional investors. For retail investors, the rates are 8.48 per cent for 10 years and 8.65 per cent for 15-year bonds.

$600-million thru ECB

In a related move, IRFC also plans to raise $600 million through external commercial borrowing. “We have already appointed lead managers for raising $600 million from external markets,” Datt said. IRFC has also raised about Rs 2,500-2,600 crore from the external market till date in the current financial year.

The coupon rates are higher than what was offered by IRFC in the tax-free bond issues in past two years, said Datt. Last year, IRFC had raised the maximum amount – compared with other issuers in the market, such as IIFCL – through tax-free bonds.

IRFC is the fund-raising arm of the Indian Railways and the money raised by it is used to buy locomotives, wagons and coaches. A small share of funds is also routed toward financing bankable projects of the Railways. In 2012-13, IRFC funds were used to acquire 581 locomotives, 1,958 coaches and 14,801 wagons. The borrowing costs of IRFC in 2012-13 stood at 8.12 per cent, which was 0.98 per cent lower than the average borrowing cost of all AAA rated entities in India put together.

On a cumulative basis, till 2012-13, IRFC has borrowed over Rs 1 lakh crore for the Railways market, which has funded procurement of 6,654 locomotives, 38,571 coaches and 1.77 lakh wagons.

IRFC keen to raise Rs.10000 Crore through Tax-free Bonds for Railway projects

New Delhi:  Months before the United Progressive Alliance (UPA) government is to table a vote-on-account for interim funding of railway expenses, a high-powered panel formed under the directions of the prime minister’s office (PMO) has suggested borrowing from the market for projects in electrical, signalling and railway construction.

According to officials, the report of the panel chaired by Member/Planning Commission Mr.B.K. Chaturvedi suggests “innovative methods of financing” be explored.

The panel is expected to give its report to the PMO by year-end. “There is a limit to which the railway can rely on increasing freight and fares to meet financing needs,” an official said.

Traditionally, the Railways does market borrowings only for its rolling stock through its financing arm the Indian Railway Finance Corporation (IRFC). Recently, IRFC expressed its intention to raise Rs 10,000 crore through tax-free bonds in the current financial year (2013-14). The bonds would be issued in one or more tranches subject to the shelf limit for FY14,” IRFC said in its draft shelf prospectus.

Earlier, the government had floated the idea of IRFC getting into project financing, but the latter was not very comfortable with the idea owing to construction risks, and time and cost overruns.

“Apart from market borrowings for projects, the committee has also suggested that Railways should increasingly look at projects under the public-private partnership (PPP) mode to fund its financing requirements,” said the official.

The Planning Commission has estimated that Railways could raise around Rs 100,000 crore through the PPP mode in the 12th five-year Plan (2012-13 to 2016-17), but according to 2013-14 Budget, it had targeted to raise just Rs 6,000 crore.

Apart from the Planning Commission member, the high-powered committee includes chairman of the Railway Board, secretary in the department of expenditure, executive chairman of IDFC, among others.

The Railways’ Plan expenditure is financed through gross budgetary support (GBS), internal accruals (Freight and Fares) and market borrowings.

In 2013-14, the Railways had pegged a Plan investment of Rs 63,363 crore of which GBS and road safety fund will contribute Rs 28,000 crore, internal resources Rs 14,260 crore, market borrowing Rs 15,103 crore and mobilisation through PPP Rs 6,000 crore.

Overall, in the 12th Plan period, the Indian Railways’ Plan expenditure has been estimated at Rs 5.19 lakh crore, of which GBS is expected to contribute Rs 1.94 lakh crore, internal resources Rs 1.05 lakh crore, market borrowings Rs 1.20 lakh crore and another Rs 1 lakh crore is expected to be raised through the PPP mode.

IRFC tax-free bonds likely in December

State-owned Indian Railways Finance Corporation (IRFC), the fund-raising arm of the Indian Railways, is planning a public issue of its tax-free bonds in December.

Funds raised by IRFC are used for buying locomotives, wagons and coaches, with a small chunk going to Rail Vikas Nigam Limited to fund bankable projects. The Railways pays back IRFC from the passenger and freight services earnings.

“We have already filed the draft prospectus and we plan to come out with the public issue sometime in December,” an official told.

The government has allowed IRFC to raise up to Rs 100 billion through tax-free bonds in the current financial year ending March.

The government has made it mandatory for issuers of tax-free bonds to raise a minimum of 70 per cent of the allocated funds through public issues.

The railway project funding institution had got bids worth Rs 12.25 billion through private placement for tax-free bonds.

“We have not decided on the actual size of the public issue yet. Also, we will be considering the coupons before coming in the market,” the official said.

IRFC files Bond Papers with SEBI

Mumbai:  The funds raised through this Issue will be utilised towards financing the acquisition of rolling stock which will be leased to the Ministry of Railways in line with present business activities.

Indian Railway Finance Corporation (IRFC) has filed draft red herring prospectus with SEBI for issue of tax free secured redeemable non-convertible bonds in the nature of debentures of face value of Rs 1,000 each. The company aims to raise Rs 10,000 crore through the issue, at par in one or more tranches in the fiscal 2014.

Rating agencies CRISIL, CARE and ICRA re-affirmed the credit rating of AAA for the debt program of the company.

The bonds are proposed to be listed on NSE and BSE within 12 working days of the issue closing date. However NSE is the designated stock exchange for the Issue.

The funds raised through this Issue will be utilised towards financing the acquisition of rolling stock which will be leased to the Ministry of Railways in line with present business activities.

Karvy Computershare Private Limited is the registrar to the issue while SBI Capital Markets Limited, A K Capital Services Limited, Axis Capital Limited, ICICI Securities Limited and Kotak Mahindra Capital Company Limited are lead Managers.

Click Here to read full article: IRFC-TaxFreeBond_181113

IRFC raises $400m via. Overseas Bonds

IRFC logoNew Delhi:  Indian Railway Finance Corporation (IRFC), the financing arm of the ministry of railways, has taken the lead in mobilising overseas debt in line with a government directive aimed at strengthening dollar inflows to wade through the expected tapering of the US government’s bond-buying programme next year. While others are still making early plans, the IRFC has mobilised $400 million as syndicated loans from three overseas banks and is now planning road shows to complete the balance debt raising plan of $600 million in January by issuing quasi sovereign bonds in overseas markets.

The Power Finance Corporation and IIFCL are still at a planning stage to complete their quotas ($1.5 billion each) of overseas bond issue.

In fact, PFC has not even confirmed that it would raise money from abroad in the form of quasi-sovereign bonds.

In August, the finance ministry mandated the IIFCL, PFC and IRFC to raise a total of $4 billion through quasi-sovereign bonds and asked banks and PSUs to raise NRI deposits and external commercial borrowings to help prop up the rupee and finance the current account deficit.

“The $1-billion target for us necessarily may not be all quasi-sovereign bonds. We have completed deal for $ 400 million in the form of loan of 5 years and depending on coupon rate we get, we will decide on overseas bonds for balance $600 million,” a senior official of IRFC told FE.

The first tranche of overseas lending has been committed by a consortium of three Japanese banks, including Mizuho Bank, SMBC and Bank of Tokyo and the State Bank of India. The official did not spell out the rate at which the loan has been offered but said it has got a very good deal. “The money under this loan will start coming in over next few weeks so our bonds issue will be between January and March next year in at least two tranches,” the official said.

The company intends to start road shows for its bonds issue later in December and will also look at tapping Sovereign Wealth Funds in Asian and European markets for its issue.

IRFC tax-free bond issue likely to hit market in Dec-Jan

New Delhi:  Indian Railway Finance Corporation, the fund-raising arm of the Indian Railways, is readying its tax-free bond issue, even as it is in the process of raising $1 billion from overseas markets.

Funds raised by IRFC are used for buying locomotives, wagons and coaches, with a small chunk going to Rail Vikas Nigam Ltd to fund bankable projects. The Railways pays back IRFC from the passenger and freight services earnings.

The Finance Ministry has permitted IRFC to raise up to Rs.10,000 crore through tax-free bonds this year.

“We are currently doing the documentation for the bond issue. It is likely to be the last large tax-free bond issue to hit the market in the current fiscal,” Rajiv Datt, Managing Director, IRFC, told.

The issue is likely to hit the market around December-January, say sources, though IRFC declined to comment on the timing. While Datt declined to comment on the timing and coupon rates of the issue, he did say that the coupon rates will be higher this year than its bond issues in the last two fiscals, given the market conditions.

IRFC, which set a target of Rs 15,103 crore in the current fiscal, has not raised any funds till the end of the second quarter. This is a repeat of the trend seen last year when it mobilised maximum funds towards the last quarter.

IRFC is also in the overseas market now to raise up to $1 billion. “We have invited bids for a $300-million syndicated loan with a five-year tenure. It has a green-shoe option, so we can raise more, depending on the offer,” Datt said.

On whether IRFC had lowered its borrowing plans for the current fiscal, Datt replied in the negative. Last fiscal, IRFC had a borrowing target of Rs 14,900 crore.

The borrowing cost of IRFC in 2012-13 stood at 8.12 per cent, which was 0.98 per cent lower than the average borrowing cost of all AAA-rated entities in India, according to R. Kashyap, Chairman, IRFC.

Indian Railways plans Dollar Bond

Today Indian Railways sells more debt to expand its network as the country steps up efforts to improve transport infrastructure that has thwarted steps to counter the worst economic slowdown in a decade.

Mumbai: Indian Railways’, India’s largest state-owned public transport system is returning to the international debt market after a year as borrowing costs fall from a 19-month high, setting the stage for the first offering from the country since July.  Indian Railways got approval from its board in Aug to borrow $1 bn abroad by March 2014, as it seeks to upgrade its network.

Indian Railway Finance Corp. Ltd (IRFC), the funding arm of Asia’s oldest rail network, has hired banks including HSBC Holdings Plc. and SBI Capital Markets Ltd to arrange meetings with investors for a foreign-currency bond sale, Managing Director Rajiv Datt said. The New Delhi-based company is also seeking an overseas loan, as ONGC Videsh Ltd has hired banks to arrange a $1.5 billion facility.

Indian Railways, which carries 23 million passengers every day, got approval from its board in August to borrow $1 billion abroad by March 2014, as it seeks to fund a $225 billion plan to upgrade the world’s third-biggest rail network. The average yield on Indian dollar debt dropped 62 basis points from a 5 September peak to 5.90%, JPMorgan Chase and Co. data show, after the US maintained stimulus that’s buoyed emerging markets. The rate on Chinese securities fell 32 basis points to 6.15%.

“Investors are of the opinion that uncertainties are behind us and soon risk appetite and liquidity will return to the markets,” Koen Vanderauwera, a bond fund manager at KBC Asset Management SA in Luxembourg, which holds more than $100 million of Indian corporate notes, said in a telephone interview on 4 October. “A borrower with strong fundamentals such as IRFC is in demand and would ride on the prevailing market sentiment.”

Bond drought

Businesses in Asia’s third-largest economy have deferred or scrapped dollar bond plans since Indian Oil Corp. Ltd’s $500 million issue in July until now as concern the US Federal Reserve will pare asset purchases triggered a fund flight from developing-nation assets. The country’s largest state refiner made last quarter’s sole offering, compared with $4.8 billion of sales in the prior period and $6.3 billion in the first three months of 2013, data compiled by Bloomberg show.

The average rate on local firms’ overseas debt jumped 92 basis points in August in the biggest increase since September 2011, according to the JP Morgan index. The yield on Indian Railway’s 3.417% dollar notes due October 2017, issued a year ago, surged to 5.10% on 5 September from 3.22% at the end of 2012, according to data compiled by Bloomberg. It has since declined to 4.45%.

The extra yield on emerging-market dollar bonds over US Treasuries has decreased to 328 basis points from this year’s high of 376 in June, according to JPMorgan data.

Positive outlook

“The spread contraction is an indication of the positive outlook and easing risk aversion after the Fed decision to maintain the pace of its debt buying,” Sergey Dergachev, Frankfurt-based senior portfolio manager at Union Investment Privatfonds, who manages $8.5 billion of emerging-market debt, said in a phone interview on 4 October. “We are anticipating an increased supply of debt from emerging markets in the short term and a significant contraction in spreads.

Overseas rates are retreating at a time when those at home are rising, making foreign capital attractive again.” Reserve Bank of India governor Raghuram Rajan unexpectedly boosted the benchmark repurchase rate on 20 September by 25 basis points, or 0.25 percentage point, to 7.5% in the first increase since 2011 to counter inflation. He cut the marginal standing facility rate to 9% from 9.5% on Monday to ease cash supply, the second reduction in less than a month, scaling back an emergency step taken in July to buoy the rupee.

Railway expansion

Top-rated five-year rupee company bonds pay 9.54%, data compiled by Bloomberg show. The average yield on Indian dollar debt is 5.9%, according to JPMorgan data. Ten-year local-currency government bonds in the country pay 8.48%, compared with 2.63% in the US and 3.97% in China, according to data compiled by Bloomberg.

Indian Railways is selling more debt to expand its 65,000-km (40,937 miles) network as the country steps up efforts to improve transport infrastructure that has thwarted steps to counter the worst economic slowdown in a decade.

The rail ministry has proposed investments of Rs.14 trillion by 2020 to expand and modernize its network. The plan will be funded via internal cash, borrowings and collaborations with companies, it said in a December 2009 document.

The nation, which has added an average of 180km of railroads every year since independence in 1947, plans to add 3,300km of freight railways by 2017. China aims to expand its network by 29,000km to 120,000km in the five years ending 2015.

Shrinking share

Indian Railways’ share of freight movement in the country has tumbled to 35% from 89% in 1951, as network expansion failed to keep pace with requirements and as surging highway construction boosted road haulage. The nation added about 50,000% of highways since 1999, according to the National Highways Authority of India.

“Emerging markets are unlikely to recover soon from last quarter’s rout as demand for riskier assets remains weak, according to Aquarius Investment Advisors Pte. Foreign funds will be wary of buying Indian bonds ahead of next year’s national election,” A.S. Thiyagarajan, a senior managing director at Aquarius Investment, which oversees about $300 million, said in a phone interview on Monday from Singapore.

While the rupee has rebounded almost 12 percent from a record low of 68.845 per dollar in August, Rajan doesn’t expect it to go back to levels before the Fed signalled in May its plan to cut stimulus, triggering outflows from developing nations. The currency rose 0.3% to 61.6350 per dollar on Tuesday, while the yield on the 7.16% government bond due 2023 slid 20 basis points to 8.48%.

‘Watch list’

Bond investors do not favour emerging markets, he said. Indian bonds are not at all in favour. While the rupee has definitely improved, nobody’s betting it is going to go to 55. Until elections, India will be on the watch list of investors.

Indian Railway’s bond-sale plan comes as the risk on Indian debt declines. Credit-default swaps insuring the bonds of State Bank of India, a proxy for the sovereign, against non-payment for five years have fallen 59 basis points from a 14-month high of 372 on 20 August, according to data provider CMA.

“Large public sector companies are looking to access the global bond markets and are timing their entry so that they can borrow at attractive levels,” S.J. Balesh, a Mumbai-based senior director at IDFC Ltd, said in a phone interview on Monday. The rally in Indian credit is also more driven by the fact that the tapering has been postponed by the Fed and issuers are looking at an opportune time to borrow.

IRFC to be the first PSU to raise Overseas Funds through quasi-soveringn bonds

New Delhi:  The Indian Railway Finance Corporation (IRFC), a Public Sector Undertaking under Ministry of Railways is likely to be first among very few other PSUs to raise funds overseas, after Finance Minister P. Chidambaram urged PSUs to do so.  Alongwith IRFC, Power Finance Corporation (PFC) is also in the similar race.

The borrowings will be through quasi-sovereign bonds. Confirming the move, a senior Finance Ministry official said the amount was being worked out. It is estimated that these two PSUs and others may bring in $8-10 billion in the current fiscal. It may be noted that such bonds (technically known as sovereign) are issued by Government-owned institutions with Government guarantee and their cost is borne by the institutions. A quasi-sovereign bond can be issued in two ways. There could either be an exclusive issue to foreign investors, such as sovereign wealth funds or pension funds, could be allowed to subscribe to part of the issue.

The Finance Ministry official said that both options could be exercised. The companies will use the funds raised to provide finance for infrastructure projects.

RPT-Fitch revises IRFC’s outlook to Stable; Affirms IDRs at BBB

Fitch Ratings has revised the Outlook on Indian Railway Finance Corporation Limited’s (IRFC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed its IDRs at ‘BBB-‘. A list of additional rating actions is provided below.

KEY RATING DRIVERS

The rating action follows Fitch’s revision of the Outlook on India’s Foreign- and Local-Currency IDRs to Stable from Negative (see rating action commentary “Fitch Revises India’s Outlook to Stable; Affirms Ratings at ‘BBB-‘ ” dated 12 June 2013 at www.fitchratings.com).

IRFC’s ratings reflect the entity’s public sector status, government ownership, and strong operational and strategic ties with the government of India (GoI), resulting in a strong likelihood of extraordinary government support if needed. As such IRFC has been classified as a dependent public sector entity under Fitch’s criteria and the ratings are credit linked to that of the sovereign.

The ratings derive strength from Ministry of Railway’s (MoR) ongoing support as evidenced by regular equity injections into IRFC since its formation. IRFC’s debt/equity ratio has been close to the regulatory 10x limit in the past three years. Fitch expects further capital injections from the MoR if this ratio were to exceed the limit; INR7.5bn and INR6bn were injected by the MoR in FY12 and FY13 respectively.

IRFC is the sole financing arm of the MoR and is mainly involved in providing finance lease to rolling stocks including locomotives, passenger coaches, and freight wagons among others. At end-March 2012, IRFC financed around 25% of the total outlay of the MoR. Fitch expects IRFC’s collaboration with the government to persist over time.

IRFC is wholly owned by the government and the board of directors are appointed by the government of India (GoI). The MoR signs a memorandum of understanding with IRFC every year to set its operational and financial performance targets, which it reviews on a quarterly basis. The Comptroller and Auditor General of India appoints auditors of IRFC on an annual basis, enhancing government control.

It has been agreed with IRFC that the MoR will cover any shortfall of IRFC by making advance payments of lease rentals if IRFC does not have sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects future standard lease agreements to continue to contain a similar assurance and the MoR to provide funding to prevent liquidity mismatch that may lead to a IRFC default.

IRFC’s profitability is resilient and highly visible since its interest income is charged on a cost mark-up basis and the capital investment pipeline of the Indian railway sector is strong. Its assets and liabilities are closely matched. With a sound reputation in capital market, Fitch deems IRFC can easily access domestic capital markets and banks for low-cost long-term funding.

RATING SENSITIVITIES

A positive rating action would stem from a similar change in the ratings of sovereign in conjunction with continued strong support from the GoI.

Material changes to its strategic importance and financing arm status to the MoR or a dilution in the government shareholding to less than 51% could result in the entity no longer being classified as a dependent public sector entity and therefore no longer being credit- linked to the sovereign rating.