Both NABARD and IRFC are offering 7.64% for 15-year tax-free bonds. NABARD bonds opened today, while IRFC will open on 10th March. The trend in recent issues may see both the issues being oversubscribed on the first day itself
The National Bank for Agriculture and Rural Development (NABARD) is raising Rs3,500 crore tax-free bonds for the first time on Wednesday, 9 March 2016. It will have investor attention even though the rate of 7.64% for the 15-year bond is what was available with recent issues too. There will be interest among investors, as these are the last two opportunities for FY15-16. Indian Railway Finance Corporation (IRFC) will raise Rs2,450 crore tax-free bonds from 10th March offering the same interest rate as NABARD. As both issues are coming at almost the same time, there may be division in the investment on the part of investors, but it may still be oversubscribed on the first day. Both issues are rated AAA by CRISIL.
The possibility of rate cuts by Reserve Bank of India (RBI) in the near future will also spur the demand for tax-free bonds. Investors who have applied for recent issues of National Highway Authority of India (NHAI) (24th February issue) and Housing and Urban Development Corporation (HUDCO) (2nd March issue) are still waiting for refund, as they could not get the full allotment, due to oversubscription on the first day itself. Due to the pending refunds, investors may not have enough liquidity for NABARD and IRFC, unless they had kept funds ready for it in advance.
Investors applying for NABARD and IRFC tax-free bonds on the first day itself may get good allotment. It just depends on investor liquidity and interest in the last two issues for the financial year, even though the coupon is not close to the psychological barrier of 8% per annum. IRFC issue will be open only for three days, which shows the confidence of quickly getting full subscription for all categories.
The Budget 2016 has made allocation of Rs55,000 crore for highways sector of which NHAI can raise tax free bonds of Rs15,000 crore. Interest rate cycle is difficult to predict. Investors who purchased many 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 in the next financial year, it will be almost impossible to guess whether future coupon rate will be higher or lower.
Tax-free bonds from government enterprises are a good option for those in the higher tax bracket and for investing for the long-term. With 10-year bank FD offering 7%-7.5% taxable interest, tax-free bonds with 7.29% coupon for 10 years (7.64% for 15 years) are 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% pa coupon.
The stock market decline in recent times has attracted investors to tax-free bonds. High networth individuals (HNIs), including Bollywood stars and corporate honchos, have been big investors in the current financial year. Smaller-size issues are getting oversubscribed on the first day itself even for the retail quota; hence, get ready for the March tax-free bonds finale.