IRFC valuation set to go up after MCA’s Notification on Deferred Tax Liability

IRFC set to gain Rs.6,300 Crore as accounting norms change. This makes IRFC ready for an IPO.

NEW DELHI: A recent notification of the Ministry of Corporate Affairs has opened the track for lower taxation of Indian Railways Finance Corporation (IRFC), the market borrowing arm of Indian Railways. This shall result in higher valuation and could speed up the green signal for an initial public offer of the company. Changes in accounting norms related to deferred tax liability by the corporate affairs ministry will free up around Rs 6,300 crore of capital with Indian Railways Finance Corporation (IRFC), giving a boost to its listing plan.

MCA on Tuesday issued a notification saying that the Indian Accounting Standard 12 that deals with deferred tax liability (DTL) will not be applicable for a government company that is in the business of infrastructure finance leasing with 75% of its revenue coming from government-owned or controlled entities for a period of seven years, a senior government official said.  “So far provisioning of DTL has generated over Rs.6,300 crore of cash with IRFC which cannot be counted as part of its net worth,” the official said. Under the amended regulations, deferred tax liability or deferred tax asset will not apply to the firm for a period of seven years starting April 1, he said.

The Ministry’s move can get the tax burden on IRFC down to 25 per cent from 56 per cent, IRFC’s Managing Director Santosh Kumar Pattanayak told. The will also result in increasing reserves and surplus, which it can use to up the equity of the company, without seeking it from the Railway Ministry. The extent of higher equity each year will increase its market borrowing capacity by ten times that of equity infusion. So far, IRFC has been paying MAT, or minimum alternative tax, at 21% and made provisioning for DTL at 35%, which led to the total tax and provisioning at 56% against maximum corporate tax rate of 34.61%. “The differential treatment of depreciation, lease rentals and leased assets arising under the Income Tax Act and the Accounting Standards gives rise to timing differences between the taxable income and accounting income of each year, which gets reversed in subsequent years over  the tenure of the lease,” said the official.

In the case of IRFC, since its business continues to grow year after year, the accretion of DTL is much greater than reversal. “Once this provisioning gets added to net worth, it will not only improve the company’s finances but also boost divestment proceed for the government,” he said. The official said Rs 6,300 crore increase in net worth can be leveraged nearly 10 times by IRFC to raise more than Rs 63,000 crore, which is even higher than the total gross budgetary support given to Indian Railways this year.

File Photo: IRFC raised $500 million 10-year green bond. Proceeds of the bond will be used to finance the eligible Green Projects under Dedicated Freight Railway Lines and Public Passenger Transport. Seen in the picture are the IRFC Officials at London Stock Exchange.

Exemption to AS22 rules

On February 5, the Ministry of Corporate Affairs issued a notification stating that the deferred tax liability (DTL) shall not apply for seven years with effect from the April 1, 2017, to a government company that is engaged in the business of infrastructure finance leasing, with not less than seventy five per cent of its total revenue being generated from such business with government companies or other entities controlled by the Government. This is an exception to the rules of Accounting Standard 22 or Indian Accounting Standard 12 that relates to deferred tax liability. This issue had been referred to the Ministry of corporate affairs by the finance ministry.

IRFC said that the exemption is going to largely benefit the public sector enterprise, which is the dedicated market borrowing arm of the Ministry of Railways, and meets a major portion of the Extra Budgetary Resources (EBR) requirements through financial leasing model.

On the impact of the notification, “The accumulated DTL is Rs 6,392 crore as on March 31, 2017. which is going to be reversed and will form part of the net worth. Besides, the provision for tax will come down to 21 per cent from 56 per cent leading to substantial improvement in profit after tax, earnings per share and book value per share. This is going to improve the valuation of the company for its maiden IPO,” Santosh Kumar Pattanayak, Managing Director, IRFC, told.

Pattanayak explained that IRFC had “huge unabsorbed depreciation” because of which the company does not pay tax under normal assessment and is subject to minimum alternate tax (MAT) 21 per cent. Besides, the company has to make provision for DTL at the rate of 35 per cent.

As a result, the company’s books are bearing a total tax provision of 56 per cent which has led to substantial reduction in the profit after tax (PAT) and in turn, inadequate accretion to reserves and surplus for which equity infusion has been sought from railway ministry at regular intervals.

Incidentally, in the previous budget, the Finance Minister had announced that the IRFC will be disinvested, something that the Railway Ministry was not aware of at that time and learnt of the news from budget announcement. This budget, the Finance Minister had said that the issue of “Deferred Tax Liability for IRFC is pending with the Ministry of Corporate Affairs.”

IRCTC and RVNL are preparing the draft red herring prospectus, according to the Budget documents.

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