The finance ministry is planning to come out with the initial public offering of Indian Railway Finance Corporation by the fourth quarter of the current fiscal.

A finance ministry official said they had noted the signs of turnaround in the economy and were keeping a close watch on the economic and market conditions to ensure the timing of the IPO is right and the shares get the price that will help the Centre meet its divestment target.

“We are targeting the end December or January quarter for the IPO. Hoping that the economic conditions would improve by then and there would be appetite for the issue,” the official said.

The IPO could fetch around Rs 1,000 crore to the government.

The financing arm of Indian Railways had earlier this year got the clearance from market regulator Sebi, but the stock meltdown following Covid-19 delayed the issue.

The IPO comprises a fresh issue of 93.8 crore equity shares and an offer for sale of 46.9 crore equity shares by the Government of India. After the IPO, the government’s holding in the company could fall to 86.4 per cent.

According to the draft red herring prospectus, IRFC mainly has two sources of revenue: earnings from the lease of rolling stock comprising engines, wagons and coaches to the railways at a margin; and earning from financing projects.

Lease rentals to IRFC include the value of the rolling stock assets leased to the railways, the weighted average cost of borrowing and a certain margin. In 2018-2019, IRFC was entitled to a margin of 40 basis points over the weighted average cost of borrowing for financing rolling stock.

In projects, IRFC gets a 35 basis points margin from the weighted average costs of borrowing for the projects.

IRFC funds about 79 per cent of the railways’ wagons, coaches and about 85 per cent of engines that make up the rolling stock.

A few years ago, it also started funding railway projects. The public sector unit has raised funds for 27 per cent of the capital expenditure on railway projects.

The railways had signed an agreement with the LIC to borrow Rs 1.5 lakh crore in 2015-16 for five years. However, the LIC has disbursed only Rs 18,000 crore , pushing IRFC to borrow Rs 60,000 crore from other sources for the projects.

The IRFC float was part of the government’s divestment target for the last fiscal. The target was reduced to 40 per cent to Rs 65,000 crore from Rs 1.05 lakh crore.

The net proceeds are proposed to be utilised towards augmenting the company's equity capital base to meet future capital requirements arising out of growth in business and general corporate purposes, according to the draft red herring prospectus.

IDFC Securities, HSBC Securities and Capital Markets, ICICI Securities and SBI Capital Markets are managing the offer.

The pandemic has derailed the government's disinvestment plan in 2020-21. A target of Rs 2.01 lakh crore had been set for current year. But with the plan hardly making any progress in the first quarter of the current fiscal and things still looking difficult, the target will be difficult to reach.