Its rules are changed to allow FDIs to issue zero-coupon bonds

NEW DELHI: The Central Board of Direct Taxes (CBDT) has changed income tax rules to allow Infrastructure Debt Funds (IDFs) to issue zero-coupon bonds.

This decision provides greater flexibility for these investment vehicles to raise funds. IDFs can be sponsored by commercial banks and non-bank lenders in India in which domestic or foreign institutional investors, especially insurance and pension funds, can invest through units and bonds.

They act as vehicles for refinancing the existing debt of infrastructure companies, allowing banks to exit a project and free up capital to finance new projects. In addition, IDF takeover of infrastructure lending from banks is seen as a way to reduce infrastructure sector risks to which banks are exposed.

IDFs can be incorporated either as a trust or a corporation and are regulated either by the Securities and Exchange Board of India or the Reserve Bank of India depending on their nature as a mutual fund or a non-bank lender. .

The Income Tax (Eighth Amendment) Rules, 2022, published by CBDT show that IDFs can issue zero coupon bonds. It also makes necessary consequential changes in related procedures, including the reporting requirement, the new rules notified on Wednesday showed.

Zero coupon bonds pay no interest to the subscriber but are issued at a discount to the face value of the bond. The subscriber receives the nominal value of the investment at maturity.

The move to provide greater flexibility to IDFs in raising resources comes at a time when the government is increasing its own capital expenditure and encouraging more private and foreign investment in India’s infrastructure sector. The Modi administration is relying on the multiplier effect infrastructure spending can have on economic growth and job creation as an economic recovery strategy. It also offers tax breaks to foreign pension funds and sovereign wealth funds to invest in the infrastructure sector.

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Garland K. Long