HUDCO Tax Free Bonds Features

by Manshu on January 2, 2013

in Fixed Deposits

HUDCO is the latest company to announce its tax free bonds issue, and there will be two series – one with a tenor of 10 years, and another one with the tenor of 15 years.

HUDCO Tax Free Bonds Open and Close Date

The issue is going to open on the January 9 2013, and will close on January 22nd 2013, and you can apply for these bonds in the Demat or the physical format.

The bonds will list on the NSE so if you wanted to trade them then you need to have them in the Dematerialized format.

Terms of the HUDCO Tax Free Bond Issue

These bonds have similar terms to the ones issued earlier by IIFCL, PFC and REC and the table below lists down some of the main ones.

HUDCO Tax FREE Bonds Options

Series 1

Series 2

Tenor 10 years

15 years

Interest Rate – Retail Investors 7.84%

8.01%

Interest Rate – Other Investors 7.34%

7.51%

Face Value Rs. 1,000

Rs. 1,000

Minimum Investment Rs. 5,000 Rs. 5,000

Can NRIs invest in these bonds?

Like the IIFCL issue, NRIs can invest as retail investors or in the other category for the HUDCO tax free bonds.

Credit Rating of the Issue

This issue has got a slightly lower rating than the other tax free bonds as CARE has rated this issue AA+ whereas it had rated the other three issuers as CARE AAA.

How much of a difference does this make? I honestly can’t give this much importance. As I’ve said several times earlier, the best way to diversify risk from your investments is to spread them across different instruments and it is very hard for even experts and auditors to predict trouble, let alone individual investors.

HUDCO is giving a slightly higher rate than other issuers for the same bonds, and there is not much more you can expect from these bonds where the interest rate is capped as it is.

Do these bonds have a step down feature?

Step down feature is where the interest rate on the bonds bought by retail investors come down to the other categories if they are bought from the stock market. All bonds that have been issued this year have the step down feature including this one.

Who is a retail investor?

Resident individuals, NRIs and HUFs who invest less than Rs. 10 lakhs in this issue will come under Category IV – Retail Investors, and will get an additional rate of interest of 0.50%.

Conclusion

As I’ve said earlier, these tax free bonds are a good option for someone in the 20% or 30% tax bracket and they are quite close in their terms of issue, so it doesn’t really matter which one you choose from. Ideally you should select two or three different ones so if something does go wrong with a particular company, you don’t have all your money invested in it.

It is likely that the interest rates are going to come down in the next month or so and if you wanted to invest in these bonds then you should look to choose one and put your money in them quickly.

Click here to download the application form

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{ 19 comments… read them below or add one }

Shiv Kukreja January 2, 2013 at 8:04 pm

Interest rates have already started to come down. The 10-year benchmark G-Sec yield has fallen from the levels of 8.15%-8.20% to below 8%. So, the companies, which will file their DRHPs now onwards, will have to compulsorily offer lower interest rates. Market prices of already listed tax-free bonds have also gone up in the last 3-4 days. Gilt funds category has given more than 1% return in the last 5 days.

Reply

Roberto el Sandriano January 2, 2013 at 8:48 pm

Hi Shiv,

HUDCO is rate for 10 yr series is 7.84% which compared to 7.69% by IIFCL. Isn’t that a lot of difference or am I missing something?

Regards
Roberto

Reply

Shiv Kukreja January 2, 2013 at 9:01 pm

Hi Roberto,

No, you are not missing anything. As per the CBDT notification, lower-rated issuers can offer 15 basis point (0.15%) higher rate of interest. http://www.onemint.com/2012/11/12/tax-free-bonds-notification-2012-13/
http://www.taxmann.com/taxmannflashes/whatsnew.aspx?sid=13099

But, I did not understand why a ‘AA+’ rated issuer (HUDCO) is giving this extra, whereas only ‘AA’ or below-rated issuers can offer a higher rate of interest. Probably this issue is ‘AA+’ rated and HUDCO is rated ‘AA’ otherwise.

Reply

Chandra Sekhar January 3, 2013 at 2:32 pm

Dear Shiv

Reference above artical,

“Can NRIs invest in these bonds?
Like the IIFCL issue, NRIs can invest as retail investors or in the other category for the HUDCO tax free bonds.”

Did IIFCL issue allows NRI to invest. When I check with my broker they told that Nri’s are not allowed for IIFCL issue.

Can you please check and advice.

Regards

Reply

Shiv Kukreja January 3, 2013 at 7:41 pm

Hi Chandra Sekhar,

There is still no clarity whether NRIs can invest in IIFCL bonds or not, it is written in the prospectus that they can but application form says they cannot. But with HUDCO and IRFC bonds, it is clear that Non-US NRIs can invest in their tax-free bonds.

Reply

rukmesh January 5, 2013 at 6:50 pm

Do they have sovereign guarantee from GoI?? I mean if HUDCO GOES bust will GoI print money and give us the money. I ask this because its rated a notch below the earlier bonds from the likes of NTPC etc. also the review articles of the previous bonds particularly mentioned the sovereign aspect, this one does not.

Reply

Shiv Kukreja January 5, 2013 at 10:39 pm

Hi Rukmesh… I dont think the Government provides any kind of sovereign guarantee with any of these companies. I could not find any such info, can you please share the source? Also, only IIFCL’s DRHP gives a little bit of information regarding sovereign guarantee which goes like this – “The Department of Financial Services, MoF, GoI, through letter dated January 23, 2012, requested RBI to create a special category of NBFC-IFC, whereby wholly owned GoI companies with borrowings backed by sovereign guarantee would be subjected to lower capital to risk weighted asset ratio than other NBFCs.”

“Accordingly, subject to certain clarifications the Company proposes to apply to
RBI for registration as NBFC-IFC.”

Reply

Rukmesh January 8, 2013 at 2:17 pm

Hi Shiv

I havent read any of the DHRPs but going through some of the articles in papers like economic times it does suggest that some of the tax free bonds have sovereign guarantee from GoI. I do not know which one. Here is the link.
http://articles.economictimes.indiatimes.com/2012-01-20/news/30647292_1_nhai-bonds-tax-free-bonds-ajay-manglunia

quote-“Furthermore, some of these bonds are backed by sovereign guarantee, which gives comfort to investors in terms of principal.” Also does that mean, even if they carry sovereign guarantee, only the Principal is guaranteed and not the interest?

Reply

Shiv Kukreja January 8, 2013 at 7:15 pm

Hi Rukmesh,

It is an old article on these tax-free bonds, at that time there was not enough clarity among people about it. The government would not like to see itself trapped in case something bad happens with any of these cos. If there is sovereign guarantee for two-three companies, then it will be there for almost all these companies.

We have not seen any company going bust in the past and I am quite confident that the govertment would payback the investors in case any of these companies goes bust, but I dont think these companies are allowed to explicitly mention “Sovereign Guarantee” in their DRHP/application forms.

Reply

cvshah January 8, 2013 at 6:16 pm

I understand that, those who do not have Demat account at the type of applying for the HUDCO (or any other such) bonds will receive them in Physical form.

Can those be converted/transferred to dematerialized form later (once Demat account is available)? Would it be too cumbersome process to ‘dematerialize’ it? How much time it may take for the process?

regards, cvshah

Reply

Shiv Kukreja January 8, 2013 at 7:37 pm

Hi… Yes, you can get these bonds converted into demat form at some later date whenever you get a demat account opened. If you get good assistance from your broking company, it is a very easy process. It practically takes 2-4 weeks time.

Reply

cvshah January 17, 2013 at 5:11 pm

Thanks Shiv for response.

Can you also advise me, on where to get and where to submit the Hudco Tax Free Bond Application form?
I’m planning to apply for it in Physical format and later on, once my demat account is opened, I would try to convert it into demat form.

Thanks, cvshah

Reply

Shiv Kukreja January 17, 2013 at 11:26 pm

You can download the application form from this link:
http://www.akstockmart.com/akintra/BA/DNLDFORM.aspx?refno=dU6gu20m1nc=

You can check the bidding centres in your city from “Download REST pages” when you download the form from the above link.

Reply

Shiv Kukreja January 23, 2013 at 10:38 am

The closing date of HUDCO Tax-Free bonds issue has been extended to February 1st.

Reply

PP February 6, 2013 at 12:18 pm

Has the deadline been further extended until Feb 7?

Reply

Shiv Kukreja February 6, 2013 at 11:31 pm

Yes PP, it has been.

Reply

PP February 6, 2013 at 12:19 pm

Has the deadline been further extended until Feb 7?

http://www.thehindubusinessline.com/companies/taxfree-issue-irfc-hudco-compete-for-
investors/article4365800.ece?homepage=true&ref=wl_home

Reply

Bhaskar February 20, 2013 at 6:29 am

Received sms that the bonds have been credited yesterday. Thanks.

Reply

Manshu February 20, 2013 at 7:56 am

Thanks for sharing that info Bhaskar. Also, it’s good that you invested in the first tranche itself because interest rates have slightly lowered after that.

Reply

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