Tax-free offer of 7.53% to 7.74% may attract retail investors based on recent trends. HNIs have been much more aggressive even though they are offered 0.25% lower coupon. Find out why IREDA coupon is better than the previous issues
Indian Renewable Energy Development Agency (IREDA) will offer tax free bond issue of Rs1,716 crore from 8th January and is supposed to close for subscription on 22 January 2016. The recent issue of National Highway Authority of India (NHAI) received Rs22,000 crore worth of applications for the Rs10,000 crore issue. Tax-free bonds are now a star attraction with Bollywood and corporate world biggies, private sector and foreign lenders pumping in crores for the hot product. However, they fell short when it came to full subscription of NHAI from retail investors, which could be due to the bigger issue size of six times. This is when compared to the holidays and retail investment previous issues. Retail investors were allotted merely 15%-20% of their investment in NTPC and Rural Electrification Corp Ltd (REC).
Considering the small size issue of IREDA, it should be a breeze and hopefully, retail investors will jump in based on higher coupon rate (by 14 basis points (bps)), when compared to the NHAI issue. NHAI, in turn, had offered higher coupon than Indian Railways Finance Corp (IRFC) by seven basis points (bps) for both 10- and 15-year bonds. It clearly shows that experts cannot predict rates of future bond issues.
Investors who had the patience to wait can look forward for some investment in the 15-year IREDA bonds @7.74%. Another reason for uptick in the coupon for IREDA is to do with the credit rating of ICRA AA+ instead of ICRA AAA for NHAI. CARE has given IRDEA issue rating of AAA (Structured Obligation).
What do IREDA tax-free bonds offer?
Tax-free bonds from government enterprises are a good option for those in the higher tax bracket and for investing for long-term. With one to 10 years bank FD offering 7.25%-7.75% taxable interest, tax-free bonds with 7.74% coupon is attractive for those in 20% or higher tax bracket. Awareness of tax savings, by investing in government owned companies’ tax-free bonds issues, has helped recent issues offering around 7.5%. Earlier, there were issues offering nearly 8% in 2012-13 but the issues had difficulty in getting subscribed quickly.
Interest rate cycle is difficult to predict. Investors who purchased lots of tax-free bonds in 2012-13 at a coupon of nearly 8% may have missed 2013-14 issues of over 9% coupon if they had not kept funds ready for it. So, invest in upcoming tax-free bonds, but do not exhaust all the funds. If there are tax-free bond issues one year from now, it will be almost impossible to guess whether future coupon rate will be higher or lower.
Since January 2015, RBI has slashed repo rate by 125 bps, Since January 2015, RBI has slashed repo rate by 125 bps. There are predictions about Reserve Bank of India (RBI) holding the repo rate till the end of financial year and other reports claiming that change is not possible till end of 2016. As expected, RBI kept the rates unchanged in its fifth bi-monthly policy on 1st December awaiting more signals on the inflation front, Pay Commission proposals and the Centre’s fiscal path. November inflation with consumer prices rising 5.4% is seen above RBI’s comfort level of 5% reducing hope of rate cut.
The future tax-free bond rates will depend on G-Sec rates which have been holding up even after the 50 bps cut in repo rate by (RBI) in September. Since January 2015, RBI has slashed repo rate by 125 bps, Since January 2015, RBI has slashed repo rate by 125 bps. Since January 2015, RBI has slashed repo rate by 125 bps, Since January 2015, RBI has slashed repo rate by 125 bps, The 10-year G-sec yield has actually increased in last couple of months to 7.74% as on 6th January primarily on sustained selling pressure from banks and corporates. However, going forward, the yields will gradually soften says State Bank of India (SBI) in its Ecowrap report. Net supply is one of the reasons why G-sec yields are not coming down.