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 |
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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.