Informist, Tuesday, Apr. 8, 2025

--Govt sources:May allow 2 PSUs to raise funds via zero-coupon bonds Apr-Jun

--Govt sources:2 PSUs may raise up to INR 100 bln each via zero-coupon bonds

--Govt sources: May allow REC, NABARD to raise funds via zero-coupon bonds

By Priyasmita Dutta

NEW DELHI - The finance ministry will likely give approval to two public sector lenders to raise funds through zero-coupon bonds in Apr-Jun, three officials with the ministry said. Though many PSUs have approached the Central Board of Direct Taxes for permission to raise funds through such bonds, REC Ltd. and the National Bank for Agriculture and Rural Development are the likely frontrunners for the approval, one of the officials quoted above told Informist.

Many PSUs have shown interest to raise funds through zero-coupon bonds after the overwhelming response to such bonds issued by REC in October after a gap of 13 years. In March the government had also given permission to REC's parent, Power Finance Corp Ltd., to raise up to INR 100 billion through zero-coupon bonds.

Fundraising through zero coupon bonds needs permission from the finance ministry as the Central Board of Direct Taxes has to provide a special tax provision to allow the return on these papers to be classified as capital gains rather than interest income. Capital gains are taxed at a lower rate than corporate tax.

While the finance ministry is still finalising the plan, it is likely to allow each of these PSUs to raise up to INR 100 billion each through zero coupon bonds, a second official said. "We do not want to give approval beyond 10,000 crores (INR 100 billion) as encouraging this instrument more and more has revenue implications for the government," the second official said.

Non-interest-bearing bonds, or zero-coupon bonds as they are popularly known, sell at a discount and do not offer any periodic interest payment. Given the advantageous tax treatment, the REC's bond issuance in October had garnered a strong response from investors, and was subscribed almost 10 times. Before that, REC had issued a similar bond in 2010-11 (Apr-Mar).

In the full Budget for FY25, the long-term capital gains tax was revised to 12.5%. Earlier, the long-term capital gains tax was 20% with indexation benefits, which allows returns to be adjusted for inflation. If the income from the bonds are classified as interest income, it would have been taxed at the marginal tax rate. For institutional investors, this would be the corporate tax rate of about 25%, after cess and surcharges.

"We are looking at giving the approvals based on a few developmental parameters...if they are working with renewables, infrastructure, priority sector and other such areas where the government is also interested in," a third official said. Power Finance Corp., which has been allowed to raise funds through zero coupon bonds by Mar. 31, 2027, is yet to tap the market.

Informist had earlier reported that REC, NABARD, and Indian Railway Finance Corp Ltd. are interested in raising funds through this special instrument. End

Edited by Ashish Shirke

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