Poor show of PFC tax-free bonds is a hurdle for the deluge of new offerings about to come

PFC bonds, offering 7.86% tax-free, have managed to get only Rs497 crore till one day before the issue closes. This is much below the Rs1,000 crore issue size and no where close to Rs4,590 crore that it wants to mop up by the end of the financial year. Find out what is going wrong

Power Finance Corporation (PFC) has launched its public issue of secured, redeemable, non-convertible tax-free bonds at an interest rate ranging from 7.69%-7.86% per annum (p.a.) for 10 and 15 year terms for retail investors. Non-retail investors will get 0.5% p.a. less. Both retail and non-retail categories are struggling to entice investors. The issue has opened on 14th December and will close on 21st December.

 

 

Subscription (in crores)

Issue reserved (in crores)

Category-1 (Qualified Institutional Investors) – 30%

Rs10.54

Rs250

Category-2 (Non Institutional Investors) – 15%

Rs73.53

Rs150

Category-3 (High Net Worth Individuals) – 15%

Rs109.43

Rs200

Category-4 (Retail Investors) – 40%

Rs304.10

Rs400

Subscription details at the end of 20th December

 

The PFC issue of Rs1,000 crore has option to retain an oversubscription up to the shelf limit of Rs 4,590 crore. It has managed to get only Rs497 crore till one day before the issue closes. This is much below the Rs1,000 crore issue size and no where close to Rs4,590 crore that the company wants to mop up by end of financial year. It means there will be future tranches from PFC to compete with tax-free bonds from other companies.

 

PFC tax-free bond offering is as follows -
 

 

10 year PFC bond

15 year PFC bond

Face value

Rs1,000

Rs1,000

Minimum application

5 bonds (Rs5,000)

5 bonds (Rs5,000)

Interest coupon for RII

7.69%

7.86%

Interest coupon for others

7.19%

7.36%

Interest payment option

Annual

Annual

Credit rating

AAA by Crisil, CARE, Icra

AAA by Crisil, CARE, Icra

Demat and Physical

Both options available

Both options available

Individual investment up to Rs10 lakh will be considered as retail application

 

Last fiscal, PFC raised Rs5,000 crore through the public issue of tax-free bonds with coupon rate of 8.2%-8.3% for 10 and 15 years term, respectively. Buoyed by the triumph of raising Rs30,000 crore last year, the government decided to issue Rs53,500 crore this year. The success of last year does not seem to be working so far.

 

Here are the possible reasons for lacklustre performance of tax-free bonds till now -

 

  • Last year only REC, IRFC and Hudco bonds had a step-down clause. All the tax-free bonds this year will come with the step-down feature. The rate will go down by 50 basis points automatically once the individual investor sells the bond in the secondary market. The flip side is that the seller will have to offload bonds at a little discount. The step-down feature is obviously, to encourage real investors to subscribe for the issue, instead of someone trying to make a quick buck, by swiftly selling it in the secondary market.
     
  • The coupon for this year has not broken the psychological barrier of 8% tax- free. Non-retail investors were getting 8.1%-8.2% coupon last year, but are offered only 7.19%-7.22% coupon this year. It has made a big difference in non-retail participation.

 

  • The intermediary commission has been reduced this year. It is kept minimal for non-retail investors. NHAI was the most successful bond issue last year. It received Rs25,000 crore for its bond offering of Rs10,000 crore. For some reason, last year NHAI was offering same intermediary commission for retail and non-retail subscription. The correlation is obvious.

 

  • Instead of approving the bond issues earlier in the financial year, the government approved it too late. In the next three to four months, ten companies will be competing to grab investor money. With less than Rs3,500 crore raised by REC and PFC combined, it will be a herculean task to raise another Rs50,000 crore at a time when interest rates are expected to fall. With lower coupon bond issues coming in Jan-Mar 2013, it will be even more difficult for companies.
     

India Infrastructure Finance Company (IIFCL) bond issue will remain open from 26th December 2012 to 11th January 2013. The company is planning to raise Rs1,500 crore with a green-shoe option up to the shelf limit of Rs9,215 crore. It is proclaiming to offer a rare opportunity to invest for up to 20 years in tax-free bonds at 7.90% coupon for retail investors. No other company is allowed to offer 20-year bonds in the current financial year.

 

Name of Company

Bond Issue Size in Rs crore

NHAI (National Highways Authority of India)

10,000

IRFC (Indian Railway Finance Corporation)

10,000

IIFCL (India Infrastructure Finance Company)

10,000

HUDCO (Housing and Urban Development Corporation)

5,000

NHB (National Housing Bank)

5,000

PFC (Power Finance Corporation)

5,000

REC (Rural Electrification Corporation)

5,000

Jawaharlal Nehru Port Trust

2,000

Ennore Port

1,000

Dredging Corporation of India

500

Ten companies authorised to issue tax-free bonds this fiscal.

 

The interest from these bonds is tax-free to investors. Today, it is difficult to get more than 9%p.a for long-term fixed deposits (FDs) from banks. Those earning more than Rs10 lakh annually are in the highest tax bracket (30%). This means that effective post-tax return from long-term FDs is only 6.3%. ‘AAA’ rated tax-free bonds giving 7.86% are a much better option. Yet, the interest is subdued as compared to last year. It could be that investors have not warmed up to the series of tax-free bonds issues or they don’t find it as much attractive as last year. The coupon for this year has not broken the psychological barrier of 8% tax-free.

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