REC’s tax-free bonds are struggling to entice investors
Moneylife Digital Team 05 December 2012

REC bonds, offering 7.88% tax-free, are yet to attract retail investors. Either the investors have not warmed up to the first in the series of tax free bonds issues or they don’t find it as attractive as last year

Rural Electrification Corporation (REC) has launched its public issue of secured, tax-free bonds at an interest rate range of 7.22%-7.88% 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 3rd December and will close on 10th December. Here are the subscription details at the end of second day (4th  December)

 

 

Subscription (in crores)

Issue reserved (in crores)

Category-1 (Qualified Institutional Investors) – 30%

Rs58

Rs1,350

Category-2 (Non Institutional Investors) – 15%

Rs90.86

Rs675

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

Rs239.88

Rs675

Category-4 (Retail Investors) – 40%

Rs598.74

Rs1,800

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

 

Last fiscal, REC raised Rs3,000 crore through the public issue of tax-free bonds with coupon rate of 8.13%-8.32% for 10 and 15 years term respectively. The success of last year does not seem to be working so far.

 

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 7.88% is much better option. Yet, the interest is subdued as compared to last year. It could be that investors have not warmed up to the first in 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.

 

According to one financial planner, “70% of the investment so far has come from Mumbai, Ahmedabad and to some extent from Hyderabad. Other cities have not woken up for subscribing to tax-free bonds. Till today morning (5 December) retail participation is only Rs625 crore. It is uncertain how the bond issues that will come till March 2013 fare.”

 

This first tranche for REC issue aggregates Rs.1,000 crore with the option to retain oversubscription up to Rs.4,500 crore. REC is allowed to raise Rs5,000 crore through redeemable non-convertible tax-free bonds. It has so far raised Rs500 crore through private placement.

 

REC offering is as follows -

 

 

10 year REC bond

15 year REC bond

Face value

Rs1,000

Rs1,000

Minimum application

5 bonds (Rs5,000)

5 bonds (Rs5,000)

Interest coupon for RII

7.72%

7.88%

Interest coupon for others

7.22%

7.38%

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

Bonds will be listed on BSE and NSE

 

Government companies are coming out with Rs53,500 crore worth of tax-free bond issues as compared to Rs30,000 crore last fiscal. Only time will tell how successful they will be.

 

10 companies authorised to issue tax-free bonds this fiscal:  

 

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

 

Comments
Sajal
9 years ago
The analysis above seems a bit off mark in terms that the issue is actually for 1000Cr with option to retain upton 4500Cr. As far as the offer is concerned the issue (i.e 1000Cr)was oversubscribed by 1.04 times the first day itself (in retail category). The subscription data on NSE currently (end of Dec 5) reads as 1.75 times in retail, 1.71 times in HNI, .61 times in corporates and .06 times in category 1 (and historically the Category 1 and 2 gets subscription only on last day)... so I expect this issue to be a success (if not 4500 Cr it shall surely cross 3000 Cr)
raj
Replied to Sajal comment 9 years ago
The first tranche for REC issue aggregates Rs1,000 crore with the option to retain oversubscription up to Rs4,500 crore. REC has been approved for Rs5,000 crores out of which they have done private placement for Rs500 crores.

BSE/NSE data we have received is with respect to Rs4,500 crores and not Rs1,000 crores. REC would rather get Rs4,500 crores now instead of just Rs1,000 crores to avoid issuing future tranches.
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