PSUs to tap sovereign wealth funds for forex inflows

In an effort to increase much-needed foreign exchange inflows, the finance ministry has reportedly worked out a strategy for as many as 10 public sector entities to tap sovereign wealth funds (SWFs) to raise at least Rs15,000 crore in foreign currency. This will be part of a tax-free bond issue.

This is the first time that such funds have been allowed to be part of a tax-free bond issue, Hindu Business Line reported. Normally, SWFs are state-owned, with funds collected from budget and trade surpluses. The money is normally invested in real and financial assets at home and abroad. Oil-rich West Asian nations own many of the world's largest SWFs.

A tax-free bond is an instrument where investors do not have to pay tax on interest. Such an instrument is normally a long-term one, and the money raised is deployed in long-term infrastructure projects. The finance ministry has allowed raising Rs48,000 crore through such bonds in the current fiscal.

At a meeting on Monday, it was decided that companies raising Rs1,000-1,500 crore or more through tax-free bonds will approach sovereign wealth funds, a senior finance ministry official told Business Line. Earlier this month, the Central Board of Direct Taxes under the finance ministry issued a notification on tax-free bonds.

Accordingly, 12 state-owned companies, and a subsidiary of the Reserve Bank of India, the National Housing Bank, have been allowed to raise Rs48,000 crore through tax-free bonds.

IIFCL, Indian Railway Finance Corporation, HUDCO, Rural Electrification Corporation, Power Finance Corporation, National Highway Authority of India, NTPC, NHPC and Indian Renewable Energy Development Agency, apart from National Housing Bank, have been allowed to raise between Rs1,000 crore and Rs10,000 crore each. These will tap SWFs.

The official mentioned that up to 30 per cent of the allocated bond size could be raised through private placement with SWFs, pension funds and gratuity funds. The tenure of the bonds would be 10, 15 or 20 years. The ceiling on the coupon (interest) rate will be linked to the reference government security rate.

Although institutions raising tax-free bonds have strong balance sheets and will not have any problem in raising money, there is also an indirect backing by the government. This will give added comfort to the overseas fund, the official added.