IRFC - Indian Railway Finance Corporation and EBR (IF)
By M Nageswara Rao
IRFC Website: http://irfc.nic.in/
Chairman & MD : Shri Amitabh Banerjee, IRAS (2020 year)
Hqrs: New Delhi
Dedicated borrowing arm of Indian Railways
IRFC's share capital has been wholly provided by the Govt. of India. Under the new companies Act, 2013, IRFC is a "Government Company" (being more than 51 % of share capital contributed by Govt.)
Recently divested its stake to the Public in the open market.
One and only Non-Banking Financial Company (NBFC) dedicated to the development of Railways
Assets as on date: Rs. 1,30, 000 Crores
IRFC is managed by a lean team - Total strength - 25 only - a rare mix of Civil servants, CAs, MBAs, ICWAs, CFAs, and Engineers. The Overhead to Turnover Ratio is 0.15 %, which is perhaps the lowest for any company the world over.
Established in the year 1986 as a Public Limited Company under the Companies Act, 1956/2013.
A Schedule ‘A’ CPSE - Central Public Sector Enterprise - under administrative control of the Ministry of Railways.
Charges a margin of 0.5% over the average borrowing rate in a year
The one and only major client is Indian Railways.
The Budgetary support from the Ministry of Finance is dwindling and insufficient internal resources to meet the rising needs of Traffic. To cope up the increasing traffic needs, Indian Railways has no other option, but to depend on mobilizing resources from Public.
No Ministry , (except Ministry of Finance) has the right to mobilize the funds by issue of bonds to the Public. So Indian Railways has floated a company under the Companies Act i.e., IRFC for raising resources from Public through issue of Bonds.
Vision: To be a premier Financial Services Company for the development of the Rail Transport sector.
Mission: To make IRFC one of the leading Financial Service Companies in the country, for raising funds from the Capital market at competitive cost for augmenting Railway plan finances
To mobilise market borrowings at the most competitive rates as per annual targets fixed by the Ministry of Railways.
To provide timely funding for acquisition of Rolling Stock assets for use by MOR.
To explore the possibility of financing CPSEs and other entities such as RVNL, RLDA, RCIL, PRCL etc for creation of rail infrastructure.
Business of IRFC is :-
To mobilize resources through market borrowings from Domestic as well as Overseas Capital Markets at most competitive rates.
Funding for acquisition of Rolling Stock Assets and leased to Railways.
IRFC also gives loans to RVNL-Rail Vikas Nigam Ltd, RLDA,Railtel Corporation of India ltd, PRCL etc towards viable and bankable projects being executed by them.
IRFC - Lease terms: -
IRFC leases the assets from the month of acquisition to IR based on a standard leasing agreement. Cost of borrowing to Railways is around 8.4%. (Whereas Cost to IRFC is 7.9 % with a margin of 0.50 %)
Indian Railways pays lease rentals to the IRFC every half year.
After 30 years, Rolling stock assets may be sold to the Indian Railways for a nominal price.
IRFC's Leasing Charges - Accounting policy
New Plan Head -2200 - Leased Assets ( Demand No.16)
Demand No.09 - Abstract G - Operating Expenses - Traffic
(OWE - Ordinary Working Expenses)
Indian Railways and improved the Operating Ratio.
Role of IRFC in Indian Railways infrastructure:
Part of EBR - Extra Budgetary Resources requirement of IR.
Share of IRFC in Capex of IR is nearly 25 %
Cumulative funding to Rail Sector - Rs. 2.20 lakh crore as of 31.03.2018
Nearly 9000 Locos, 50000 coaches, 2.5 lakh wagons - constitute nearly 75 % of the Total Rolling stock fleet of Indian Railways.
Three fourth of ( 75 % ) of Rolling stock assets operating on the Indian Railways network is funded by IRFC.
Target for IRFC - Rs.30,000 Crores (out of Rs.1,60,000 Crores) -2020-21 Capex
EBR (IF) – Extra Budgetary Resources (Institutional Financing)
Existing/traditional sources of finance in Indian Railways are 1) Loan Capital 2) Depreciation Reserve Fund 3) Development Fund 4) Railway Safety Fund 5) Capital Fund 6) EBR – Extra Budgetary Resources like IRFC, RVNL, PPP.
Context/backdrop of initiating EBR (IF):
To overcome the shortage of funds for the works programme, the Railway Ministry decided to borrow funds from INSTITUTIONS, so as to ensure the completion of crucial railway projects for generation of revenue.
FACTS ABOUT EBR(IF)
Utilised for only priority works such as New Lines, Gauge Conversion, Doubling, Traffic Facilities, Railway Electrification, S&T etc. - Object is to enhance throughput on the congested corridors.
In future, several institutions including foreign pension funds may fund the Railway projects through this mechanism.
IRFC will raise funds from LIC against BONDS periodically based on IRs requirements.
Deposit -IF account is maintained by PAO/RB/Northern Railway (similar to the IRFC Deposit a/c for rolling stock funding).
EBR-IF funded projects would be treated like 'DEPOSIT WORKS" for accounting of fund flows. However no departmental charges i.e., 12.5 % shall be applicable for works funded from EBR(IF). (Because departmental charges are levied for Deposit works, but the works which are proposed were purely Railway ones)
Though Interest, but it is capitalised and charged to Demand NO.16 (PH 2200)
Charged to Demand No.09-790
Charged to Demand No.16(PH 2200)
Mechanism of LIC funding Railway projects is an interesting one. IRFC issued BONDS to the LIC.
The funds which recd through BONDS , will be provided to the Indian Railways for completion of crucial projects by IRFC.
Based on the Lease Agreement, IR will pay the Lease charges to the IRFC during the lease period. Usually Lease charges contain i) Capital component chargeable to New Allocation 2231(projects) & 2232(Rolling stock) under Minor Head 2200 i.e., Plan Head 2200 under Demand No.16 and ii) Interest component chargeable to Demand No.09 - Operating Expenses - Traffic ( 09-791 (Projects) & 09-792 (Rolling stock)
COMPARISON OF IRFC FUNDING ROLLING STOCK AND PRESENT FUNDING BY LIC
Public listing of IRFC
The initial public offer (IPO) of the IRFC - January 18-20, 2021, at a price band of Rs 25-26 per share
Subscribed nearly 3.5 times.
It received bids for 432 crore shares against the issue size of 124.75 crore shares.
Ahead of the IPO, IRFC had raised about Rs 1,400 crore from anchor investors.
The issue constituted up to 13.64% of the post issue paid-up equity share capital of the company.
Became the first NBFC from the PSU sector that went public today.
The IPO of the fifth railway's company to hit the stock market since 2017- comprised an issue size of Rs 4,600 crore, out of which the fresh issue comprises Rs 3,100 crore and OFS Rs 1,500 crore. IRFC share allotment was finalised on January 25.
Government's stakeholding reduced to 86% from 100% post the IPO.
The company will utilise the net proceeds from the Rs 4,634-crore IPO towards augmenting the company's equity capital base to meet future capital requirements arising out of growth in business and general corporate purposes.
It is currently traded around Rs. 25 /- per share face value Rs. 10 /- (on 12th March, 2021)