Many of the investors have been waiting for the tax-free bonds to be issued during 2012-13. In the annual budget in March this year, the former Finance Minister, Pranab Mukherjee, had proposed tax free bonds to the tune of Rs. 60,000 crore for the companies in the infrastructure development or infrastructure finance space.
After waiting for more than seven months, the wait seems to be coming to an end. The notification for the tax free bonds for financial year 2012-13 has been released by the Ministry of Finance on tuesday, November 6th. Here is the Taxmann link to the notification.
NHAI, IRFC, PFC, REC and HUDCO have been allowed to issue these bonds again this year and IIFCL, NHB, JNPT, Dredging Corporation and Ennore Port will be the new entrant issuing these bonds this year. These bonds will be issued for 10 years, 15 years or 20 years. IIFCL is the only company among the ten companies which has been allowed to issue these bonds for 20 years.
Like it is done in most of the bond issues, the investors would be classified in the following four categories:-
1) Retail Individual Investors (RIIs)
2) Qualified Institutional Buyers (QIBs)
4) High Net Worth Individuals (HNIs)
Most importantly, the definition for the “Retail Individual Investors” has been modified. As per the notification, Retail Individual Investors would mean those individual investors, Hindu Undivided Families or HUFs (through Karta), and Non Resident Indians (NRIs), applying for upto Rs. 10 lakhs in each issue. Individual investors investing more than Rs. 10 lakhs will be classified as High Net Worth Individuals (HNIs).
Last year, the limit for the retail investors was Rs. 5 lakhs and if you remember, REC had set the limit at Rs. 1 lakh earlier and then reset it back to Rs. 5 lakhs when the issue got a poor response on the first day of its offer period in the retail investors category.
Like last year, there would be an applicable ceiling on the coupon rates offered by the issuer companies, based on the reference Government security (G-sec) rate. The ceiling coupon rate for ‘AAA’ or ‘AA+’ rated issuer companies will be 65 basis points (or 0.65%) less than the reference G-sec rate in case of Retail Individual Investors and 115 basis points (1.15%) less than the reference G-sec rate in case of other investors like Qualified Institutional Buyers (QIBs), Corporate and High Net Worth Individuals (HNIs).
In case of issuer companies having credit rating of ‘AA’ or below, the ceiling coupon rate will be 50 basis points less than the reference G-sec rate in case of Retail Individual Investors and 100 basis points less than the reference G-sec rate in case of other investors.
Retail investors would be eligible to a higher rate of interest to an extent of 50 basis points. The higher rate of interest, applicable to the retail investors, will not be available in case the bonds are transferred, except in case of transfer to legal heir in the event of death of the original investor.
As per the notification – “The reference G-sec rate would be the average of the base yield of G-sec for equivalent maturity reported by Fixed Income Money Market and Derivative Association of India (FIMMDA) on a daily basis (working day) prevailing for two weeks ending on Friday immediately preceding the filing of the final prospectus with the Exchange or Registrar of Companies (ROC) in case of public issue and the issue opening date in case of private placement”.
Last year, Central Board of Direct Taxes (CBDT) had stipulated that in case of public issue, the interest rates on these bonds were not to be less than 50 basis points lower than the yield on government securities of equivalent residual maturity as reported by FIMMDA on the last working day of the month preceding the month of issue of bonds. Also, the same formula was applicable to all categories of investors. So, this year the differential gap between the interest rate for the retail investors and the interest rate for other investors has been increased to 50 basis points.
If the issuer entity has been rated by two rating agencies and their assigned ratings are different, in that case the lower of the two ratings will be applicable to the issuer company and accordingly, the company might be able to offer a higher coupon rate.
In case the issuer company decides to make the interest payments semi-annually, it will have to lower the coupon rate by 15 basis points or 0.15%.
The companies are allowed to issue these bonds either through public issues or private placements. As per the notification, at least 75% of the authorised amount of bonds issued by each entity will have to be raised through public issues. For instance, NHAI and JNPT will have to raise at least Rs. 7,500 crore and Rs. 1,500 through public issues respectively.
The maximum issue size in each tranche of a private placement can only be Rs. 500 crore. In case of public issues, 40% of each such issue will be reserved for the retail investors category.
Last year, these tax free bond issues got a super response and off late, all these bonds have given a very handsome returns to the investors. With the interest rates falling this time around, it seems to me that the bonds already listed on the exchanges would still remain in high demand. Lets see which company comes out with the first bond issue this time.