Tax Free Bonds open for subscription in 2013

by Manshu on February 20, 2013

in Fixed Deposits

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 – Mar 15 2013

AA+

7.53%

7.69%

NA

 
PFC Tranche 2
Feb 25 2013 – Mar 15 2013

AAA

7.38%

7.54%

NA

 
REC Tranche 2
Feb 25 2013 – Mar 15 2013

AAA

7.38%

7.54%

NA

 
IRFC Tranche 2
Feb 25 2013 – Mar 15 2013

AAA

7.38%

7.54%

NA

 

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.

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{ 17 comments… read them below or add one }

Bhushan February 20, 2013 at 7:50 pm

I couldn’t find answer to one query. I had invested 10 lakh in PFC bond as retail investor. Now, if I invest anything in it, for the financila year, I would have crossed 10 lakh inv in it. In that case will I be considered non-retail and given less interest rate? or will these be considered separate and I get retil investor int rate?

Reply

Manshu February 20, 2013 at 8:19 pm

From what I’ve read and understood, the status of whether someone is retail or not is decided per bond issue and not cumulative.

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Shiv Kukreja February 20, 2013 at 11:25 pm

Yes, that is correct. It is Rs. 10 lakhs for every single issue.

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Bhushan February 21, 2013 at 8:02 am

Thanks Manshu, Shiv.

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Raj February 21, 2013 at 10:53 am

do u have any idea – of any other bond issues coming up after 15th March 2013, are there more such issues lined up for this FY ?

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Manshu February 21, 2013 at 3:56 pm

IIFCL might come up with their issue, but it is just 15 days before the financial year closes so I wouldn’t count too much on that.

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siddhant February 21, 2013 at 10:56 am

Manshu,

the liquidity in these bonds is very low, is it not better to invest in other bonds with capital gain perspective , it is just too long a time for which the money gets locked up. even decent debt mutual funds will give similar rates but with shorter time period.

Also considering all the hoopla around growth don’t you think in 2-3 years situation will become inverse & rates are bound to go up. would it mean that tax free bond investors will be trapped at low interest for 10-15 years with no exit option(I am only looking at retail portion only).

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Manshu February 21, 2013 at 3:55 pm

Siddhant,

For me it is not the question of one or the other, but a mix of all investments. I’d like to buy FMPs, other debt mutual funds, have FDs that cumulate and then this as well. I feel it is a good instrument which comes with good security and it’s better to own them throughout the maturity than to sell them for capital gains. I don’t know that you can really make big enough capital gains in these or any other bond issue to have a meaningful impact on your portfolio. I’d look for equities for that.

As for interest rates, I don’t know that I would stop from locking in to these rates with an expectation that interest rates will go up 2 – 4 years down the line. For one thing, any debt instrument will go down in value if that were to happen, and for another that expectation may never materialize.

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vikrant February 21, 2013 at 6:47 pm

Mansu,

You mentioned that ” it’s better to own them throughout the maturity than to sell them for capital gains. ” my question is when you hold them for their entire team we get the interest, and at the end of the maturity we get the principal back, what happens if the Interest rates really go down substantially lets say in next 5 to 8 years, if it does i am sure that value would increase and it could be a good time to sell and make the capital gain, what do you say.

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ARUN BATRA March 1, 2013 at 7:56 pm

Ten/ fifteen years is too long a time for any one to advice. Pl take suggestion “to hold till maturity” as generic and take real time decisions as per the then prevailing conditions and your own financial needs.

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Manshu March 4, 2013 at 5:02 am

Vikrant,

The way I look at this is that you will never have capital gains in bonds that are so significant that they really make a big difference to your portfolio. That said, maybe for someone with a portfolio of only bonds it makes sense to sell and lock in capital gains, or your bonds rally 30 – 40%, then the gains do make a difference.

I can’t realistically see a situation right now where I feel locking gains on capital gains on bonds will make sense because you will get cash that you will now have to deploy on lower yielding fixed income instruments and you will have to pay tax on it. That’s just my line of thinking.

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Varun February 26, 2013 at 11:47 am

Government had allowed 10 companies to issue Tax free bonds for this financial year, but we saw only 5 companies issues these. Why other 5 companies didn’t came up with these bonds (like Ennore port etc.) or they are still in pipeline and hope to launch them soon?

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Shiv Kukreja February 26, 2013 at 3:12 pm

Probably other companies dont have any immediate requirement of funds. NHAI is yet to utilize the funds it got in the last year’s issue. I read somewhere that NHB would be coming out with an issue soon.

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Shiv Kukreja February 26, 2013 at 8:01 pm

Ennore Port tax-free bonds issue opens on February 28th, yielding 7.51% p.a. for 10 years and 7.67% p.a. for 15 years. The issue is rated ‘AA-‘ by CRISIL and CARE.

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ARUN BATRA March 1, 2013 at 8:07 pm

Shiv – The rules for these issues were notified sometime in Nov 2012. I recall NHAI coming out with announcement that they do not need any funds. Tardy progress of their projects due to problems with environment ministry are well known. The targets for road building together with setting up of a regulator announced in yesterday’s budget and prevailing market conditions may make them review their decision. Pl do not forget any issue should be preceded by decision of the Board and filing prospectus. Then legally they should draw the money by end-Mar (I am not sure if March end deadline applies to allotment or issue closure or drawl of money). I wonder if they have enough time for all this.

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Varun March 4, 2013 at 1:03 pm

Strangely, Encore Port issue is not available with any online trading platforms.

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ARUN BATRA March 4, 2013 at 6:16 pm

Shiv has already pointed out that Encore Port is AA- rated. Kindly think twice before subscribing to it. I would not do it. Liquidity will be a BIG ISSUE.

Reply

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