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i-maritime Newsletter

Tax-free bonds: Will ports miss the opportunity? - 2011-12-08

Have you heard the story of a dog and his coconut? If not, here is it in brief, as narrated by a port official explaining the status of the tax-free bonds allotted for the port sector. Seeing a farmer plucking tender coconuts, a hungry village dog asked him for one. The farmer gave the dog a full un-husked coconut. It dragged it to its resting place and tried to break it; the dog bit it, hit it and kicked it several times, but in vain.

Finally, the dog went back to the farmer and sought his help to break it. The farmer told the dog: “Get lost, never ask for something if you don't know how to make use of it”.

The port official was trying to drive home a point: The inability of Indian ports to take advantage of a facility to raise low-cost funds.

More than eight months have passed after the Union Budget had granted Rs 5,000-crore tax-free bonds to raise funds for the port sector.

Believe it or not, the Shipping Ministry still has no clue how to go about it and it has been knocking at the doors of the Finance Ministry for guidance. In all probability, ports may miss the opportunity, as they have less than four months to float the bonds; they will have to do it before the end of this fiscal.

Like the dog in the tale, it was the Shipping Ministry which had asked for tax-free bonds for the fund-starved port sector which is under its administrative control. But when it was given, the Ministry didn't know who would issue the bonds - a single port, private or public, major or minor or whichever needed the funds, or a third-party. The bureaucrats in the Ministry were totally clueless. And they went back to the Finance Ministry for advice.

Like the farmer in the tale, the Finance Ministry has rejected the proposal of one of the ports saying that it is not eligible for tax-free bonds as its kitty is in surplus. And the buzz in the ports sector has it that the Shipping Ministry was advised to do its homework before forwarding any proposal to the Finance Ministry.

Tax-free bonds generally enable the issuer to raise funds at a lower rate compared with normal bonds. According to tax experts, the difference in interest rate could work out to 2-2.5 percentage points. Some tax-free bond issues currently in the market are offering nine per cent interest. The Rs 5,000 crore given to the ports sector was part of the Rs 30,000 crore tax-free bonds allotted to the infrastructure sector for this fiscal.

Unlike sectors such as rail, road or power, there is no dedicated financial institution for the ports sector.

Therefore, initially, the Shipping Ministry thought it better to authorise the proposed Indian Maritime Finance Corporation to issue the bonds.

But when it realised that it would take a longer time to form a new institution than for an existing one to float the bonds, the Ministry sounded out the Ennore Port, the only corporatised port among the major ports in the country, to do the job.

Tax experts told Ennore that it could raise money through the bonds only for its own use. If it wanted to issue bonds for the entire Rs 5,000 crore and share the funds with other ports, Ennore would require to float a non-banking finance company. The port was not keen to play the role of a nodal agency.

Since one port cannot raise the entire amount of Rs. 5,000 crore, the Shipping Ministry had approached the Finance Ministry for guidelines.

Meanwhile, the Shipping Ministry had asked other ports, both public and private, whether they would be interested in these bonds.

Who doesn't want cheaper funds? Private ports responded immediately saying that they would be ready to borrow double the amount offered by the Government. They did not hear anything from the Government till date. Besides Ennore, the Jawaharlal Nehru Port, Kochi, and Kolkata were among the major ports put in their request. The JN port had sought Rs 1,600 crore for capital dredging for which bids have already been invited. Ennore and Kochi ports have sought Rs 1,100 crore and Rs 1,500 crore respectively for different development works.

The wise men in the Finance Ministry think that JN Port is not eligible to issue tax-free bonds as it has a triple “A” rating and is totally debt-free.  The logic is clear — the rich need not be given tax-relief. Then, what about Ennore, Kochi, or Kolkota?

For the port sector, the Rs 5,000 crore is pittance. According to the Government's own estimate, the port sector needs investment of more than Rs 2.8 crore over the next ten years.

The irony is that the advisors of the Shipping Ministry could not work out a plan on time to help ports raise a relatively small amount like Rs 5,000 crore.

Will the port sector be able to take advantage of the tax-free bonds this fiscal? Will the Finance Ministry reconsider their decision on JNPT's request?

Even if it does, it is only about Rs 1,600 crore. What about the balance amount. Will other ports be able to raise it? The ball is in the Shipping Ministry ‘s court.

Source: Hindu Business Line