IRFC likely to decide on issue of retail bonds following IPO response

Spurred by the huge response to its $1 billion overseas bond issue, Indian Railways Finance Corporation (IRFC) expects investors to lap up its initial public offering (IPO) in the coming days. 

A date for the public offering is yet to be set. But according to media reports, the IPO could be floated around mid-March.

IRFC is a special purpose vehicle (SPV) that raises finances for the infrastructure needs of the railways. 

Even as the railways is run by the government, the financing requirements are tackled by IRFC on behalf of the government. IRFC bonds have sovereign guarantee, even as the balance sheet of IRFC is used to service the bonds. 

IRFC leases out assets to the government, and the lease rental covers all such expenses. 

In the current financial year, IRFC’s mandate is to mop up Rs 65,400 crore out of which it has already raised nearly Rs 40,000 crore, IRFC’s managing director Amitabh Banerjee told Business Standard. 

The next year’s target has not yet been communicated to IRFC.

The quasi-sovereign company was the first Indian public sector unit (PSU) to raise a 30-year bond. Except Reliance, no other Indian company raised such a long-tenure bond in the international market.

The 10-year bond, used to raise $700 million, was oversubscribed eight times and the 30-year bond was oversubscribed seven times for an amount of $300 million. The rate of interest for the 10-year bond was 3.25 per cent, whereas the 30-year bond coupon was at 3.95 per cent. The offer was open for all investors globally, and pension funds as well as sovereign wealth funds were big buyers.

“We were pleasantly surprised by the response. This has now created a benchmark in the overseas market for Indian PSUs and other corporate sector entities,” said Banerjee.

IRFC engages in selective hedging of its foreign exchange exposure, and even those costs are passed on to the government.

“We save around Rs 600-650 crore by doing selective hedging. Our risk management team is always engaged in figuring out any early warning signs on the foreign exchange fluctuation part. We don’t want to hedge our entire portfolio. The idea is how to make borrowing cost cheaper for the government, which runs the Indian Railways,” said Banerjee.

Despite receiving good response overseas, the domestic market continues to be the mainstay for IRFC, from which it raises 93.5 per cent of its financing need.

The firm is not averse to issuing retail bonds, but will take a call on that depending upon the response received from the IPO.

The government will offer for sale 5 per cent of its stake, while there will be fresh issuance of another 10 per cent. 

After dilution, the stake of the government in the firm will be 86.14 per cent. However, within three years, the government’s shareholding would become 75 per cent,  according to capital market listing norms.

“The government guarantee will continue to remain intact. Besides, we are improving our operating ratio, and it will remain below 100,” said Banerjee.  

The government also plans to hand over some aspects of the railways to private parties, but Banerjee said they are small in number, and doesn’t really make a difference in the railways vast operations.

“Private parties may improve efficiency and bring some competition in customer service. But these are just experimental schemes as of now in just about 150 routes. If the private parties want, we can help them with their finances too,” said Banerjee.