16 August 2013 2013 2013mber EY Tax Alert Government of India notifies the entities eligible to issue tax free bonds for financial year 2013-14 Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of latest tax issues. For more information, please contact your Ernst & Young advisor This Tax Alert summarizes the entities notified by the Government of India (GOI) to issue tax free bonds for the financial year 2013-14 and the guidelines/ conditions laid down in relation to issue of such bonds.
Background The Income-tax Act, 1961 (Act) provides that interest income payable by a public sector company in respect of notified bonds or debentures shall be exempt from income-tax. The Central Board of Direct Taxes (CBDT) has recently issued a notification 1 (Notification) notifying the entities eligible to issue tax-free, secured, redeemable and non-convertible bonds during the financial year 2013-14 and the guidelines/ conditions with respect to issue of such bonds. The entities notified to issue tax-free, secured, redeemable and non-convertible bonds (along with the allocated amount) has been provided in Annexure. This alert summarizes the key aspects of the Notification issued by the CBDT. Guidelines/ conditions Tenure The tenure of the bonds shall be 10 or 15 or 20 years. Permanent Account Number (PAN) The subscribers are mandatorily required to provide a PAN to the issuer. Interest rate The manner in which the interest rate has to be determined is as follows: There shall be a ceiling on the interest (coupon) rate based on the reference Government Security (G-sec) rate. The reference G-sec rate is to be computed in the prescribed manner. The ceiling interest rate shall vary based on the credit rating 5 of the issuing entity. Eligible Subscribers The following are eligible to subscribe to such bonds: The bonds can issued either through public issue or on a private placement basis. Retail Individual Investor (RIIs) 2 Qualified Institutional Buyers (QIBs) 3 Corporates (including statutory corporations), trusts, partnerships firms, limited liability partnerships, etc High Net-worth Individuals (HNIs) 4 The conditions to be complied with and the cap to be adhered to by the issuing entity in relation to public issue and private placement have been prescribed under the Notification. Issue expenses 6 have been capped at 0.25% and 0.65% of the issue size for private placement and public issue, respectively. 1 Notification S.O. 2424E dated 8 August 2013 2 RII, inter-alia, means individual investors, Non- Resident Indians (NRIs) applying for upto INR 1 million in each issue. 3 QIBs as defined under Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000. Foreign Institutional Investors are included in the above definition. 4 HNIs mean individual Investors investing more than INR 1 million in each issue. 5 Assigned by a credit rating agency approved by the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) 6 Issue expenses includes expenses like brokerage, advertisement, printing, registration etc
The interest income shall be exempt from tax for the subscriber only where the subscriber registers his name and holding with the issuing entity. Repayment of Bonds The issuing entity is required to submit a financing plan 7 to the Ministry of Finance to demonstrate its ability to repay the funds borrowed. 7 To be to be submitted within 3 months of closure of issue
Annexure Notified entities and allocated amount Sr No. Issuer Entities Amount (INR billion) 1 Cochin Ship Yard Ltd 2.5 2 Ennore Port Ltd 5 3 Airport Authority of India Ltd 5 4 Indian Infrastructure Finance Company 100 Ltd 5 Indian Renewable Energy Development 10 Agency Ltd 6 Housing and Urban Development 50 Corporation Ltd 7 Rural Electrification Corporation Ltd 50 8 National Housing Bank 30 9 Power Finance Corporation Ltd 50 10 Indian Railway Finance Corporation Ltd 100 11 National Highways Authority of India 50 12 NHPC Ltd 10 13 NTPC Ltd 17.5
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