REC 8.71% Tax-Free Bonds Issue – August 2013: The Bond to Bond With

The current environment in the Indian financial market can perhaps be termed cataclysmic. The stock indexes have made losing a habit and the Rupee is headed for the Marina Trench. Investors are in a gloomy mood and are desperate to latch on to options which can keep them buoyant in troubled waters.

Every cloud has a silver lining and the unruly waves also throw up a crest after a trough. Tax Free Bonds from Rural Electrification Corporation (REC) is such a feel-good news which is sure to put some enthusiasm back in investors. The bond is poised to make its public appearance on 30th August 2013 and the interest rates on offer for the 10 year, 15 year and 20 year terms are 8.26%, 8.71%, and 8.62% respectively for the term periods. These are healthier by 0.70% to 1.50% when compared to the rates on offer last year.

So what are the salient features of the REC bonds?

Well, REC plans to raise Rs. 3500 crores from the market which is inclusive of the green-shoe option of Rs.2,500 crore. What’s more, the issue is expected to be oversubscribed and hence will perhaps be closed before its schedule closing date of 23rd September 2013. As per the terms of the CBDT notification , REC can raise 70% of the total amount through public issue meaning that the total amount allowed by the government, to be raised is Rs. 5000 crores.

The balance amount will in all probability be raised through private placements.

Let us have a look at the salient features of the issue:

Who can invest?

• Non-resident Indians (NRIs), Qualified Foreign Investors (QFIs), Retail Individual Investors, Hindu Undivided Families (HUFs) through their Kartas can all invest in these bonds.

Four categories of investors can invest in the issue:

• Qualified Institutional Bidders (QIBs) – 20% of the issue reserved
• Non-institutional Investors (NIIs) – 20% of the issue reserved
• High Net Worth Individuals including HUFs, NRIs & QFIs – 20% of the issue reserved
• Retail Individual Investors including HUFs, NRIs & QFIs – 40% of the issue reserved

What will be the interest payment and record date?

• Investors are keen to know this beforehand so that they can plan accordingly. For this issue the interest payment date will be December 1 and the record date will precede this by 15 days.

Whether there is a cumulative option?

• There is no cumulative option. Interest is payable annually.

What is the safety rating and the nature of the bond?

• CRISIL, CARE, India Ratings and ICRA rate the bond highly at ‘AAA’. REC, being a ‘Navaratna’ PSU offers a secure and safe investment option through these bonds. The bonds are also further secured by certain assets of the company.

How long will it take to get these bonds listed on the stock exchange?

• Within 12 working days from the date of the close of the issue, the bond will be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Investors have the option of holding the bonds in either dematerialized (demat) or physical form.

What are the TDS applicability and the minimum investment?

• Being Tax Free bonds these instruments do not attract any TDS provisions. Minimum investment to be made is for Rs. 5000 or 5 bonds of face value Rs. 1000 each.

What is the Interest on Application money and Refund?

• REC will pay successful applicants at the coupon rates as applicable and at 5% per annum to the unsuccessful applicants.

Effective yield

(30.9% tax bracket)11.95%12.60%12.47%Effecitve yield

(20.6% tax bracket)10.40%10.97%10.86%Effecitve yield

(10.3% tax bracket)19.21%9.71%9.61%

Options	Series 1	Series 2	Series 3
Tenure	10 years	15 years	20 years
Coupon rates (Retail Individual investors)	8.26%	8.71%	8.62%

What kind of taxes will the sale of these bonds attract?

• Bonds listed on the stock exchange if held for more than 12 months before sale will attract a flat rate of 10% long-term capital gain tax. If held for less than 12 months it will be treated as short-term capital gain and will attract tax at the commensurate tax slab for the investor.

What makes the bond offer more attractive than last year?

• Last year there was a huge disparity in the interest rate paid to retail-investors vi’s-à-vi’s other investors. Moreover, subsequent buyers of the bond from the secondary market were offered a lower rate of interest. The cut from G-Sec rate was also pegged on the higher side. All these aberrations have been more or less rectified this year.

The differential between the interest rates offered to the retail individual investor and the other category of investors have been reduced drastically and is now just 0.25 % as compared to 0.50% last year. This is one of the best things to have happened this year and is sure to attract more investors from other categories both during the initial period and later in the secondary market.

How has REC managed to announce higher interest rates in these indifferent market conditions?

• The RBI, in an attempt to control the free-fall of the market in these trying financial conditions, has raised the yields of the benchmark government securities (G-Secs). The coupon rates of the REC bonds have been fixed on the basis of these G-Secs. It is because of this rise that REC has been able to offer such rates.

Verdict:

Given the current scenario, the REC interest free bonds are the best thing to have happened after the overall dismal market mood. It would perhaps not be right to compare this with the fixed deposit schemes offered by banks primarily because of its tax benefits. This is really a good investment option for those who are looking for long term, risk-free and tax free investments.

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