IRFC scraps ₹5,000 cr 10-year zero-coupon bonds issue as cut-off rises

State-owned Indian Railway Finance Corporation (IRFC) on Monday scrapped its planned issuance of Rs 5,000 crore in 10-year zero-coupon bonds (ZCB) after bids came in at a higher yield from investors, sources said.

 

IRFC, the dedicated financing arm of the Indian Railways for mobilising funds from domestic as well as overseas capital markets, got bids at a 6.95 per cent cut-off, which was 16 basis points higher than the cut-off it had raised last month through the same instrument.

 

Last month, it raised Rs 2,981 crore through deep-discounted ZCB at an attractive yield of 6.79 per cent.

 

Sources said the state-owned institution was looking to raise funds at a similar level but investors wanted a higher cut-off. As a result, it decided to scrap the issuance.

 

IRFC’s ZCB had a base issue size of Rs 1,000 crore and a green shoe option of Rs 4,000 crore.

 

A ZCB is a type of debt instrument that does not pay periodic interest. Instead, it is issued at a deep discount and redeemed at its full face value upon maturity, with the profit being the difference between the purchase price and the maturity value.

 

“Buoyed by the earlier response to its ZCB issuance in November, IRFC returned to the market within barely 20 days with a fresh Rs 5,000 crore ZCB issuance immediately after the RBI’s policy announcement to cash in the repo rate cut. However, the bond market narrative has shifted. Despite a 25-basis-point repo rate cut, long-end yields refused to soften. Persistent rupee weakness, unresolved US tariff issues, subdued FPI participation and heavy supply of ultra-long-tenor bonds from both the Centre and state governments continued to exert upward pressure on the 10-year G-sec,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

 

The yield on 10-year government securities has moved up 8 basis points (bps) since the RBI’s 25 bps rate cut earlier this month.

 

“As investor demand thinned and cut-off yields drifted at least 15 basis points above the earlier tranche, pricing appeared misaligned with post-policy expectations. Rather than accept higher yields and risk unsettling existing investors or distorting the still-nascent ZCB curve, IRFC chose to withdraw the issue — signalling discipline rather than distress, and reinforcing confidence among existing bondholders,” Srinivasan said.

 

Previously, state-owned PFC and Small Industries Development Bank of India (SIDBI) had scrapped their scheduled bond issuances totalling Rs 11,500 crore last week, after investor bids in the auction came in at yields higher than what the issuers were willing to accept.