REC Tax Free Bond Issue 2012 – 13

by Manshu on November 28, 2012

in Credit

REC is the first company to start offering tax free bonds in this financial year (2012 – 13) and their issue opens on December 3rd 2012 and ends on December 10 2012.

REC has been allowed to raise Rs. 5,000 crore through tax free bonds this year out which they have already raised Rs. 500 crores via private placement and this issue is for Rs. 1,000 crores. So this means that there likely will be another tranche before the financial year ends. However, last year’s experience shows that there is very little variation in the interest rates of even two issuers, let alone two issues from the same company. The interest rate on tax free bonds is also capped to the average G-Sec yield of the same maturity so there’s not much much you can expect in terms of a better rate.

Terms of the REC Tax Free Bond Issue

There are two series of bonds, one with a 10 year maturity and another with a 15 year maturity and then there are 4 categories of investors that can invest in them.

Retail investors get a slightly higher interest rate, and they are under category IV.

Here is a table that shows the details of this issue.

Particulars

REC Tranche 1 Series 1

REC Tranche 1 Series 2

Face Value

Rs. 1,000

Rs. 1,000

Interest Rate: Retail Investors

7.72%

7.88%

Interest Rate: Other Investors

7.22%

7.38%

Tenor

10 years

15 years

Interest Payment

Annual

Annual

Physical and Dematerialized Form

REC is going to issue the bonds in both physical and dematerialized so you can buy them offline if you are inclined to do so. This also means that a Demat account is not necessary to buy these bonds.

Which sections are these bonds tax free under?

Somebody wanted to know this  last year, and I imagine that’s more for preparing for an exam of some sort rather than any real practical use, but anyway, the bonds are exempt under Section 10 (15)(iv)(h) of the Income Tax Act 1961.

Listing of the Bonds

Bonds will be listed within 15 days of closing of issue on both NSE and BSE, and there is no lock in on them so you can trade them in the secondary market immediately after listing.

Secured Issue

These are secured bonds which means that if REC goes insolvent, these bondholders will be paid before unsecured creditors. This doesn’t however guarantee full payment, and is no other form of guarantee either. In the past I’ve seen some people confusing a secured issue to mean something equal to a government guarantee that come what may, I will pay you money, and that’s not the case.

Who are Category IV Retail Investors?

There are four categories of investors for these bonds and the last category of investors which is the retain category get a slightly higher interest rate(half a percent). A retail investor is someone who invests less than Rs. 10 lakhs in these bonds.

Credit Ratings

This bond issue has got very high rating, and that’s not surprising given REC’s financial standing. They have been rated CRISIL AAA/Stable by CRISIL, CARE AAA by CARE, IND AAA by IRRPL and ICRA AAA by ICRA. These are the best credit ratings that these companies assign and denotes excellent credit standing per the credit rating companies.

When will interest be paid?

This information will be useful next year when people are looking for interest payments, and the interest on the REC tax free bonds will be paid once a year on December 1st.

Is there a step down feature?

A step down feature means that the rate of interest that you get if you buy the bonds from the stock exchange is lower than what you would get if you were the primary allottee when the company issued the bonds. It exists with this issue so you will get a lower rate compared with what you get if you subscribe to the issue now directly with the company. The lower rate is half a percent lower, which is basically the premium retail investors are getting.

How does this issue compare with listed bonds?

In terms of pricing, the quick check I did on the prices indicate that these bonds are better especially if you include the transaction cost, but I do need to dig deeper in this aspect and I’m sure a good discussion will ensue in the comments section so I will either update the post with that information or do a second new one.

What listing gains can I expect if I flip these bonds upon issue?

I have no idea.

Where can I get the REC bond application form?

You can get it at your local bank, and if you are going to apply online using ICICI Direct or Kotak or any other broker then they will have it. If you can’t find it and want one then here is a link to the bonds that AK Capital created for Shiv as sub broker, so the incentive charged will go to him. This doesn’t however mean you pay anything extra. For more info or to invest in Tax-Free bonds in Delhi/NCR, you can contact Shiv at +919811797407

Conclusion

I think tax free bonds are a good thing to have for most people in the 20% or 30% tax bracket, which ones doesn’t matter that much. They are all quite similar as far as ratings goes and interest rate goes. I would say that it is always better to buy them from two or three different issuers so in case something does go wrong, all your money is not invested with just one company.

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