Tax free bonds are the flavour of the season. This is evident from the oversubscription of two recent issues of tax free bonds by NTPC and Power Finance Corporation (PFC) on the very first day of the launch. In fact, PFC bonds were oversubscribed within a few hours of the launch.
There could be a number of reasons behind this overwhelming response to tax free bonds - attractive yield for individuals falling under high tax bracket, no new issuances of tax free bonds since FY 2013-14 and downgrading of a few corporate papers.
In 2013-14, around 13 entities raised Rs.48,000 crore through tax free bonds. Bangalore based advisor Srikant Matrubhai feels that the recent Amtek Auto episode has prompted investors to invest in safer instruments. “People have lost trust in debt funds after the downgrade of a few corporate papers. Hence, a lot of investors have moved towards safer options like tax free bonds and AAA rated instruments.”
Hyderabad based M S Shabbir of SenSage points out that investors flocked to these bonds due to expectations of a rate cut by RBI. “Since rate cut was around the corner, many investors invested in tax free bonds of PFC and NTPC to lock-in higher yields.”
Recently, the Central Board of Direct Taxes (CBDT) has given tax free status to the bond issues of seven state-owned entities – NHAI, IRFC, HUDCO, IREDA, PFC, REC and NTPC.
These companies are collectively allowed to raise Rs.40,000 crore in FY 2015-16 through issuance of tax free bonds. 70% or Rs.28,000 crore can be raised through public issue. Nearly 40% or Rs.11,200 crore is reserved for retail investors. Both NTPC and PFC have already raised Rs.700 crore each.
Here are the detail of the issues:
|
Entities |
Allocated amount of bonds (in crore) |
Allocated amount to be raised through public issue (in crore) |
|
National Highways Authority of India (NHAI) |
24000 |
16,800 |
|
Indian Railway Finance Corporation (IRFC) |
6000 |
4,200 |
|
Housing and Urban Development Corporation Limited (HUDCO) |
5000 |
3,500 |
|
Indian Renewable Energy Development Agency (IREDA) |
2000 |
1,400 |
|
Power Finance Corporation (PFC) |
1000 |
700 |
|
Rural Electrification Corporation (REC) |
1000 |
700 |
|
National Thermal Power Corporation Ltd (NTPC) |
1000 |
700 |
Source: CBDT
The tenure of these bonds is 10, 15 and 20 years.
CBDT has put a limit on coupon rates. AAA rated companies can offer 55 bps lesser than G-Sec securities to retail investors. Similarly, AA+ issuers can offer 10 bps above the AAA rated companies and AA or AA- rated companies are allowed to offer 20 bps above the effective yield of AAA rated companies. The current yield of G-Sec is 7.55% as on September 2015.
Both the issues of NTPC and PFC offered an effective yield up to 7.62% and 7.60% per annum to retail investors for a tenure of 20 years respectively.
Though the yields are attractive at this juncture for individuals falling under high tax bracket, the effective yield can go down due to the rate cut. On September 29, RBI has cut its key repo rate by 50 bps. “Other issuers will offer low coupon rates post the rate cut by RBI. It may disappoint investors who were looking for attractive rates in these bonds,” says Dhirendra Kumar, CEO, Value Research.
CBDT has allowed these entities to charge a maximum onetime expense of 0.65% of the issue size. This 0.65% should be inclusive of all expenses incurred on brokerage and advertisements.
