February 20, 2013

Tax Free Bonds open for subscription in 2013

The last few days saw 4 companies announce the second tranche of their tax free bonds, and with the exception of HUDCO, the other three have identical interest rate and maturity periods.

The interest rates on the second tranche has gone down when compared with the first tranche and that’s because the interest rate on G-Secs have gone down between the time the first tranche was issued and now.

There is only one company that issued bonds earlier and hasn’t come out with a second tranche and that’s IIFCL. They were the only one to have a 20 year term so none of the bonds presently in the market (or to be issued shortly) have a 20 year term.

Here are the details of all the 4 tax free bond issues that are either open now or will open shortly.

Issuers	Open and Close Date	CARE Credit Rating	10 years Retail	15 years Retail	20 years Retail	Interest Payment Date
HUDCO Tranche 2	Feb 18 2013 â€“ Mar 15 2013	AA+	7.53%	7.69%	NA	Â
PFCÂ Tranche 2	Feb 25 2013 â€“ Mar 15 2013	AAA	7.38%	7.54%	NA	Â
RECÂ Tranche 2	Feb 25 2013 â€“ Mar 15 2013	AAA	7.38%	7.54%	NA	Â
IRFC Tranche 2	Feb 25 2013 â€“ Mar 15 2013	AAA	7.38%	7.54%	NA	Â

These are all reasonably safe issues to invest in, and I think even with the lowered interest rate are useful for people in the 30% tax bracket. You can spread your money in two or more issues to diversify since they are so identical in nature. If you have any other questions please leave a comment, and I’ll answer them.

IRFC Tax Free Bonds – 2013

IRFC is the fourth company that I’ll be writing about which is issuing a second tranche of their tax free bonds, and their term structure is identical to REC and Â PFC.

The issue will also open on February 25th and close on March 15th 2013, and that’s exactly the same as the other two as well, and I’m not sure why all these companies have decided to come out with their issues at the exact same time.

Option	Tranche- II Series 1	Tranche- II Series 2
Tenor	10 years	15 years
Minimum Investment	Rs. 5,000	Rs. 5,000
Coupon Rate for Retail Investors	7.38%	7.54%
For Others	6.88%	7.04%
Interest Payment	Annual	Annual

The issue is rated AAA which is the same as the other two and that’s probably the reason why they have the same interest rate as well.

Like the earlier issue this time you can invest in this issue in paper or Demat form and the bonds will be listed on the BSE so you don’t have to hold them to maturity but can trade them as well.

The interest will be paid annually, and there is no option to reinvest the interest in the same bond. I couldn’t find the interest payment date in the prospectus so if anyone knows that then please leave a comment.

This is the fourth post about tax free bonds and since they are so similar I don’t know what else to add. I will however note that they are talking about doing away with tax free bonds from next year onwards so if you are in the 30% tax bracket then these are good to own in your portfolio. Also, it’s good to diversify and own bonds from two or more issuers since their terms are quite identical.

If you have any questions then please leave a comment and I’ll answer them.

Click here to download the application form

REC Tax Free Bonds 2013

REC is the third company that I’m going to write about that has issued a second tranche of tax free bonds. PFC and HUDCO were the first two.

REC had also released the first tranche of its tax free bonds earlier and like the other companies, it has lowered the interest rates on its second tranche due to the lowering of the interest rates.

Here are the issue details from the second tranche of REC tax free bonds.

Option	Tranche- II Series 1	Tranche- II Series 2
Tenor	10 years	15 years
Minimum Investment	Rs. 5,000	Rs. 5,000
Coupon Rate for Retail Investors	7.38%	7.54%
For Others	6.88%	7.04%
Interest Payment	Annual	Annual

Credit Rating of REC Tax Free Bonds

CRISIL has given this issue its highest ‘CRISIL AAA’ rating, and CARE has also given this issue its highest ‘CARE AAA’ rating.

Open and Close Date of REC Tax Free Bonds

The issue opens on February 25th 2013, and closes on March 15th 2013.

Listing of the Bonds

The bonds will list on both the NSE and the BSE, and will start trading shortly after their issue.

Dematerialization and Physical Form

If you have a Demat account then you can buy these bonds in Demat account but it is not necessary to have one to own these since you can also subscribe to these bonds in the paper form. You can only trade in them in Demat form though.

Security and Safety

I feel that all these bonds coming out are fairly secure in nature but it is always good to spread around your money and not invest all of it in just one issue. Currently, there are 4 issues open so you can split your money in two or three of them.

Conclusion

I’ll keep this post short because there is not a lot new that I have to say other than what I’ve already written in other reviews but since a lot of people read one and not the others, I’ll just repeat that since interest rates are coming down, and these bonds may not be in existence next year onwards, it makes sense for people in the 30% tax bracket to have these as part of your portfolio.

If you have any other questions, please leave a comment, and I’ll answer them.

Click here to download the application form

HUDCO Tax Free Bonds 2013

Just a few days ago PFC announced their tax free bond issue, and now HUDCO has also announced the second tranche of their tax free bond issue.

The issue structure is similar to the earlier one but the interest rate is lower than the first tranche. This is because the interest rates on these bonds is tied to the interest rate on G-Secs and those yields have come down since the issue of the first bond.

The rate is still however slightly higher than those of the second tranche of PFC tax free bonds.Â Â The issue is also rated one notch lower than those of PFC. It is ratedÂ â€˜CARE AA+â€™ from CARE and â€˜IND AA+â€™ from IRRPL.

Option	Tranche- II Series 1	Tranche- II Series 2
Tenor	10 years	15 years
Minimum Investment	Rs. 5,000	Rs. 5,000
Coupon Rate for Retail Investors	7.53%	7.69%
For Others	7.03%	7.19%
Interest Payment	Annual	Annual

HUDCO Tax Free Bond Open and Close Date

This issue opens on the 25th February 2013 and closes on March 15 2013.

Interest Payment

There was a question on the previous post about how the interest will be paid, so I’m adding the answer to that in this post as well. The interest will be paid annual, and there is no option of getting the interest reinvested in the bond like you can do in a fixed deposit. At the time of maturity you get interest for the final year plus whatever you initially invested in the bonds.

Listing of Bonds

This doesn’t mean that your money is locked in the bond for 10 or 15 years as these bonds will be listed on the NSE as well as BSE and you can sell the bonds there at any time. However, the market price of the bonds fluctuate on the stock exchange so you may get a higher or lower price than what you paid at the time of purchase. Presently, interest rates are going down, and bond prices go up when interest rates go down so the chances that the price of these bonds are higher on the stock exchange one year down the road is greater than the chance of their price being lower than the face value.

Who is a retail investor?

A retail investor is an individual or a HUF who invests less than Rs. 10 lakhs in this bond. If you buy the bonds from the stock exchange then you won’t get the additional interest that is available to the retail investor.

How can I buy the bond?

If you have a Demat account and a trading account with a broker like ICICI Direct or Edelweiss, then you should be able to buy the bond online itself. It is not necessary to have a demat account to buy these bonds though, and you can also go to a branch of Karvy, ICICI Securities or Axis Capital to buy these bonds. These are the registrars of the bonds so you should have the option to buy the bonds from them, but I’m sure there are other sources where you can buy them as well. Please leave a comment if you have bought or are going to buy these HUDCO tax free bonds from one of the other sources.

Conclusion

I don’t have much to add other than what I said in the post about the PFC tax free bonds, which is the fact that this is a good interest rate for people in the 30% bracket, and these bonds may not even exist next year so it is probably a good idea to have some part of your fixed income portfolio in a tax free bond issue, either this or any of the other ones. You might also want to diversify and buy the bonds from two or three different issuers since their terms are so similar.

Click here to download the application form

PFC India Tax Free Bonds – 2013

What are the twin deficits?

With the budget looming close, the reference to India’s twin deficits have increased even more than usual, and I thought I’d do a quick post on them.

When someone refers to India’s twin deficits, they are referring to the following two things:

Current Account Deficit
Fiscal Deficit

Current Account Deficit: I have done a fairly detailed post on current account deficit (Read: What is BoP and Current Account Deficit?) so I will keep this definition brief. Current account deficit is the difference between a country’s exports and imports, and when imports exceed exports, a country is said to be running a deficit on its current account.

Oil and gold are India’s two big imports, and the last budget saw the duty on gold being raised from 2% to 4% in order to slow down gold imports and ease the current account deficit. This hardly helped, and India will have a current account deficit again. Any measures in the budget to slow down imports or boost exports will help the current account deficit.

Fiscal Deficit:Â Fiscal deficit is the difference between the revenues and expenses of the government that they have to cover by engaging in borrowing from the market.

This covers everything and is not restricted to imports or exports. Any measures to reduce spending, or generate additional tax revenues or other revenues like disinvestment are aimed to bring the fiscal deficit under control. (Read: What is fiscal deficit?)

Why are these two a problem?

Why do we hear so much about these two deficits, and why are they a problem?

A lot of countries run these deficits and having these deficits is not a problem on its own. It is the magnitude that’s the problem. In the last budget, the government borrowing constituted about 35% of their total revenues. This means that the government had to raise money even to pay for their recurring expenses, and that’s never a good thing.

Imports exceeding exportsÂ perenniallyÂ can become a problem because the country has to part with foreign exchange with which it pays for these exports and in India’s case, the forex hasn’t been a problem in recent years because of capital inflows like FII money, but you can’t rely on them all the time.

Together they weaken the country’s financial position, and let’s hope to see some good measures on easing the burden on them in this budget.

Related articles