What are Tax-free Bonds?

The term ‘tax-free bonds’ has a liberating ring to it. It gives a feeling of ‘freedom from the bondage’ of taxes which shackle us perennially. “What are tax free bonds after all?”, well, the answer is simple- they are investment options guaranteeing fairly good returns with the emphasis on the aspect of tax exemption. New investors who wonder – “what are government bonds?” or “how do bonds work?” or are simply unsure as to how they can buy bonds need not worry, the procedure and mechanism of purchase is rather simple and easy to understand.

Throughout the year various tax-free bonds are launched and each of them attracts substantial interest from the investors. These tax exempt revenue bonds offer exciting interest options over the tenure of 10, 15 and 20 years.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Subscription Opens

NHPC (formerly National Hydroelectric Power Corporation) has announced the launch of its tax-free bonds and the sale of bonds commences from 18th October 2013 and is due to continue till 11th of November 2013. However, NHPC has the option of extending or curtailing the time-frame depending on the response received from investors, i.e. the over or under subscription of the bonds.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Interest Rate

Another tax-free bond with a similar, in fact almost identical profile has also been launched by PFC (Power Finance Corporation) . Both the NHPC and PFC offer the same coupon rates – 8.92 % per annum for 20 years, 8.79% per annum for 15 years and 8.43% per annum for 10 years.

Now let us get a close look at the basics of the NHPC Tax-free Bonds October 2013 issue. This information will be helpful for the investor when he or she contemplates – how to purchase bonds.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Size

The size of the issue is the quantum of money which the particular bond issuing authority aims to mop up from the market. NHPC is aiming to collect Rs. 700 crore from the market and is within its rights to retain over subscriptions upto Rs. 300 crores making it a Rs. 1000 crore issue.

Incidentally this happens to be the smallest issue of tax-free bonds to hit the market in the current year. NHPC is optimistic about its issue and does not intend to take the private placement route as there is a healthy demand for high yielding bonds in the market.

Can NRI invest in NHPC 8.92 % Tax-free Bonds October 2013 Issue

Even though the NHPC and PFC are identical in its yield rate and many other aspects, there remains a major difference. Non-resident Indians (NRI’s) and qualified foreign investors (QFIs’) who are interested in investing in tax-free bonds have to opt for the PFC issue as NHPC does not allow NRIs’ and QFIs’ to invest in its bonds.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Rating

All bonds are rated by certified rating agencies, based on parameters like safety. The NHPC Tax-free Bonds October 2013 issue is rated ‘AAA’, the best in the category, by agencies like ICRA, CARE and India Ratings. The bonds are secured by a charge on specific assets of the company. Such a charge acts as a guarantee for investors. They are assured that they won’t lose money.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Listing

NHPC has achieved a first by being the only company so far to have obtained necessary approval for getting its tax-free bonds listed on the National Stock Exchange (NSE) and Bombay Stock exchange (BSE).

Listing Date of NHPC 8.92 % Tax-free Bonds October 2013 Issue

NHPC Tax-free Bonds October 2013 issue are due to be listed on the stock exchanges within 12 days from the date of the close of the issue. Investors can hold NHPC Tax-free Bonds October 2013 either in a de-materialized format or a paper form.

Allotment Status of NHPC 8.92 % Tax-free Bonds October 2013 Issue

Successful allottees will receive interest on the tax free bonds, as per the coupon rate, on their investment, from the date of realization of application money till one day prior to the date of actual allotment. Unsuccessful allottees will receive interest @ 5% per annum.

Lock-in-period on NHPC 8.92 % Tax-free Bonds October 2013 Issue:

NHPC Tax-free Bonds October 2013 issue personify freedom in more sense than one. They are not locked-in, which means that the investor can sell the bonds at the prevailing market rate any time after it has been listed on the exchange.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Interest Payment Date:

The first interest payment by NHPC Tax-free Bonds October 2013 issue is due to be made on 1st April 2014. Subsequently the interests in the following years will also be paid on the 1st of April. The record date for payment of interest or the maturity proceeds will be 15 days prior to the date when the amount is payable.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Investment limit:

A retail investor can invest between Rs. 5000, i.e. 5 bonds of Rs. 1000 each and Rs. 10.00 Lakhs. Any investment beyond Rs.10 lakhs will change the status of the investor to HNI which will mean a lower rate of return.

So investing in tax free government bonds or government infrastructure bonds offer excellent returns to the investor. These are guaranteed return bonds which are insulated against the vagaries of the financial market.

NHPC 8.92 % Tax-free Bonds October 2013 Issue Vs PFC 8.92% Tax-free bonds October 2013 Issue

For the investors, the ‘dilemma of plenty’ can pose a perplexing situation. It can be a deterrent for the investor in making the right choice. The simultaneous availability of two tax-free bonds at the same time and with the same return can add fuel to confusion. So here is a comparison and an opinion about which among the two, NHPC or PFC is a better option for investment as far as investment in tax-free bonds are concerned.

Point of distinction	NHPC Tax free bonds	PFC Tax free bonds
Issue size	Rs.1000 cores	Rs.3875.90 crores
Coupon rate for 10 years	8.43%	8.43%
Coupon rate for 15 years	8.79%	8.79%
Coupon rate for 20 years	8.92%	8.92%
Rating	AAA	AAA
Listing	BSE & NSE	BSE
Can an NRI invest?	NO	Yes

If we go by George Orwells doctrine, ‘all men are equal but some are more equal’. Similarly, even though both the issues are almost identical, there are some differences in the profile and finances of the two entities. NHPC is a bigger organization with a higher market cap and superior P/E ratio. Considering the overall aspects and the profiles of these two power generating units, it can be concluded that NHPC is a better bet than PFC.

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