HUDCO 8.76% Tax Free Bonds Issue – September 2013

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

After a reasonably good response to the REC tax-free bonds, the next eligible company to come up with such an issue is Housing and Urban Development Corporation Limited (HUDCO). The company will be launching its issue from the coming Tuesday, September 17.

The rates the company is going to offer in this issue are higher than the rates offered by REC in its issue, which is still open and getting closed on September 16. There are two reasons for it, firstly, HUDCO issue is ‘AA+’ rated and that is why it can offer rates 10 basis points (or 0.10%) higher than any ‘AAA’ rated issuer. Secondly, the average G-Sec rates have been ranging higher in the past 10-20 days than they were earlier when REC came up with its issue.

As compared to REC’s 8.26% (10Y), 8.71% (15Y) and 8.62% (20Y), HUDCO is offering 8.39%, 8.76% and 8.74% rate of interest for the respective tenors.

Though the interest will be paid annually, I do not know the interest payment date as yet, as the final prospectus filed on September 11 is still not available on SEBI’s website, on BSE’s website, on HUDCO’s website and not even on any of the lead managers’ websites. It is quite disappointing for me not to have the prospectus available for public reference even three days prior to the issue opening date.

HUDCO is allowed to raise Rs. 5,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 190.80 crore through private placement. So, now it plans to raise the remaining Rs. 4,809.20 crore through this public issue, including the green-shoe option of Rs. 4,059.20 crore. The base issue size is Rs. 750 crore.

The official closing date of the issue is October 14 and the company may extend or preclose the issue, depending on the investors’ response to the issue.

There are many things which are common in this issue and the REC issue, so I will quickly state those features which are different in this issue.

Rating of the issue – CARE and India Ratings have assigned a rating of ‘AA+’ to this issue, which is also ‘Secured’ in nature. HUDCO is wholly-owned by the government of India, so the investors’ investment is quite safe.

Listing – HUDCO will get these bonds listed only on the Bombay Stock Exchange (BSE). The allotment and the listing will happen within 12 working days from the closing date of the issue. Investors can apply for these bonds either in physical form or in demat form, as per their comfort and requirement.

Interest on Application Money & Refund – The investors will get interest on their application money also, from the date of investment till the deemed date of allotment, at the same rate of interest as the applicable coupon rate is. Unlike REC issue which is to pay 5% p.a. interest on the refund money, HUDCO will pay the applicable coupon rate.

Categories of Investors & Basis of Allotment – The investors again have been classified in the following four categories and each category will have certain percentage of the issue reserved for the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved

Category III – High Net Worth Individuals including HUFs, NRIs & QFIs – 30% of the issue is reserved

Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue is reserved

QIBs portion had 20% of the issue reserved in the REC issue and after observing their response in that issue, their reserved portion has been reduced to 10% in this issue. Category III HNI investors will get this 10% share of the pie. NRIs are eligible to invest in this issue as well, on a repatriation basis as well as on non-repatriation basis. Qualified Foreign Investors (QFIs) are also eligible.

Minimum & Maximum Investment – There is no change in the minimum investment requirement of Rs. 5,000 i.e. at least 5 bonds of Rs. 1,000 face value each. Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.

Interest rates of this issue look very attractive to me. Earlier I used to say that the investors in the 30% or 20% tax bracket should consider these bonds, but now I advise investors even in the 10% tax bracket to go for these bonds. Though not strictly comparable, these bonds are attractive even against IIFL NCDs or Muthoot NCDs.

I think the way Indian rupee and the stock markets have recovered in the past 10 days or so, the G-Sec yields should also start falling soon. Going forward, I think the rates should not be higher than these HUDCO bonds, unless US Fed Reserve has something very dramatic in store for us in its meeting on September 17-18.

Link to Download the Application Form of HUDCO Tax-Free Bonds

If you need any further info or you want to invest in these bonds, you can contact me at +919811797407

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208 thoughts on “HUDCO 8.76% Tax Free Bonds Issue – September 2013”

  1. Hi Shiv,
    Would like to thanks for your in depth advice. I decided to split my Investment 50-50 in HUDCO bonds and NRE deposits. Another reason went for HUDCO bonds was that money in my NRO account was in 30% tax bracket hence made sense to put that in tax free bonds. Would also be investing in future tax free bonds so will continue to follow your advice on coming issues.

    Many thanks
    Singh

  2. Day 3 (September 19) subscription figures:

    Category I – Rs. 50.50 crore as against Rs. 480.92 crore reserved
    Category II – Rs. 162 crore as against Rs. 961.84 crore reserved
    Category III – Rs. 275.34 crore as against Rs. 1,442.76 crore reserved
    Category IV – Rs. 398.99 crore as against Rs. 1,923.68 crore reserved
    Total Subscription – Rs. 886.83 crore as against total issue size of Rs. 4,809.20 crore

  3. Day 2 (September 18) subscription figures:

    Category I – Rs. 0.50 crore as against Rs. 480.92 crore reserved
    Category II – Rs. 73.69 crore as against Rs. 961.84 crore reserved
    Category III – Rs. 223.63 crore as against Rs. 1,442.76 crore reserved
    Category IV – Rs. 289.11 crore as against Rs. 1,923.68 crore reserved
    Total Subscription – Rs. 586.93 crore as against total issue size of Rs. 4,809.20 crore

  4. 1. I have already applied for 150 bonds from ICICI Direct. Can I apply 100 more.
    2. If sl 1 is no they can I apply from my kotak account.

    It will result in multiple applications but total amount will be below limit of Rs 10 Lakhs.

  5. Federal Reserve decides not to taper QE3, will keep its bond buying programme steady at $85 billion. US markets cheer the news – Dow Jones, S&P 500, Nasdaq, all up more than 1%. Bonds rally with 10-year US bond yield falling below 2.70%. Indian markets should also cheer it today when markets open.

  6. thanks a lot for the answer.
    Can you please explain what is the meaning of :-

    ” Partnership firms in the name of the partners” ?

    any firm with 4 family members & 2 HUF members in it can invest ?
    ( Its not registered firm…)

    1. Not sure what exactly does “Partnership firms in the name of the partners” mean, but I think these are partnership firms with “unlimited liability” of the partners.

      Also, a partnership firm can invest in these tax-free bonds and as per the prospectus of the issuers, it is required to submit the following documents along with the application form:
      1. Partnership Deed
      2. Any documents evidencing registration thereof under applicable statutory/ regulatory requirements
      3. Resolution authorizing investment and containing operating instructions (Resolution)
      4. Specimen signature of authorized person

      So, an unregistered partnership firm cannot invest in these tax-free bonds. But, an HUF can, as the HUF is not required to be registered to apply for these bonds. At the same time, the HUF must have its own Permanent Account Number (PAN) and bank A/c.

  7. HI Shiv
    Thanks for the clear vision, & Guidance on any topic …
    I just wanted to know that can we apply for HUDCO Taxfree bonds in the name
    of private unregistered firm ..? ( Its a family own partnership firm , I am referring t0. )
    If yes what interest we are eligible for & in which category ? The firm doesn’t have A D mat a/c, so it would be physical option only.
    Pls guide asap.

    1. Hi Aryan,

      There are two categories of partnership firms which are eligible to invest in these bonds:
      1. Limited Liability Partnerships, registered under the Limited Liability Partnership Act, 2008
      2. Partnership firms in the name of the partners

      Unregistered partnership firms are not allowed to invest in these tax-free bonds. Registered partnership firms fall in Category II and are eligible for a lower rate of interest.

  8. Day 1 subscription figures:

    Category I – Rs. 0.51 crore as against Rs. 480.92 crore reserved
    Category II – Rs. 40.47 crore as against Rs. 961.84 crore reserved
    Category III – Rs. 160.54 crore as against Rs. 1,442.76 crore reserved
    Category IV – Rs. 161.45 crore as against Rs. 1,923.68 crore reserved
    Total Subscription – Rs. 362.96 crore as against total issue size of Rs. 4,809.20 crore

  9. Hi Shiv,
    Your columns are simple to read & understand , website is uncluttered.
    I would like to take this opportunity to thank you and your team for the hard work. keep it up.
    Regards.

  10. Thanks for your reply. I am an NRI and still deciding weather to go for it or not as Interest on NRE deposits are very attractive as well at this point and are also tax free.

    Regards

    1. I think the rates should not rise further from hereon, unless some kind of panic strikes again. There is FOMC meeting happening in the US today & tomorrow, after which there should be some clarity on where the rates are headed.

      REC & HUDCO have the advantage of issuing these bonds immediately after a sharp surge in G-Sec yields going past 9%, so their reference average G-Sec yields are higher. If this yield goes past 9% again, then you can expect higher rates going forward. It looks reasonably unlikely to me.

  11. Hi Ajay/ Shiv,
    Based on the below comment, where or how can I buy at secondary market. I am planning to invest in this bond, but if I can getter better return with low bond price, I will opt for secondary market. Please let me know. Thanks,

    Hudco bonds from earlier issues are available @ 9 + YTM

    Regards,
    Sundar.

  12. Hi Shiv,

    Thanks for your detailed information, are you able to find Interest Dates for these Bonds? Couple of observation, this issue’s rating is 1 notch below REC issue & interest is just 5 BPS extra for 15 years duration. Hudco bonds from earlier issues are available @ 9 + YTM in secondary market. This is going to list only in BSE so will have lesser liquidity and trade at a discount compared to bonds which gets listed on both BSE & NSE. Do you suggest to subscribe to this issue or any other good alternatives currently in market or expected to be coming in the market?

    Thanks,
    Ajay

    1. Hi Ajay,

      1. Interest payment date is not there even in the prospectus, which means HUDCO’s interest payment date will be exactly 1 year after the date of allotment.

      2. Though it is AA+ rated, HUDCO’s business model looks better to me. REC lends to the State Electricity Boards (SEBs) and there are delays on payments on several occasions. So, I think safety-wise both are equally good.

      3. I dont think any of the HUDCO bonds are yielding 9%+. N2 is yielding 8.5%, N5 8.57%, N3 8.66% & N4 is yielding 8.48%. With public offers, there are no transaction costs either. So, I think it is better to go for these bonds in public offers.

      4. Listing only on the BSE is slightly -ve. It would have been better for these bonds to get listed on the NSE also. But with such a big issue size and high interest rates, I dont think liquidity would be a problem with these bonds. For better liquidity, one should go for that Series which is getting the highest subscription or higher institutional demand.

      5. I think IIFCL issue should hit the markets in the next 7-10 days. It is ‘AAA’ rated and I think it is a better company than REC & HUDCO, but interest rates should be lower than both REC & HUDCO.

      1. looks like IIFCL is 10 basis points less than HUDCO. if we are investing less money should we wait for IIFCL instead of investing in HUDCO.

          1. Private placement rates have nothing to do with public offer rates. I think IIFCL rates would be at least 20-30 bps lower than HUDCO rates because average G-Sec yields would be lower for IIFCL.

        1. It is up to you whether you want to invest in ‘AA+’ rated issue of HUDCO with 20-30 basis points higher rates or you want ‘AAA’ rated issue of IIFCL with lower rates. The decision is yours.

      2. Hi Shiv,

        One query on the relevant note… I have purchased HUDCO bonds in Jan ’13 (as part of initial public offer and not from secondary market). Looking at the NSE Live Market link on the current trading and YTM data, it mentions N1, N2, N5 etc… How can I map them with the ones that I’ve purchased? My de-mat account statement does not mention anything like N1, N2….against these bonds. Please guide. Same confusion for other tax-free/bonds/NCDs – NHAI, SBI, Religare, Sriram etc…

        Thanks, cvs77

  13. Hi Shiv,

    The coupon rate for REC bonds issued this year are same for IPO and Secondary market buyers. Given that these bonds are likely to trade at below face value, does it make sense to invest via IPO?

    Secondly, a basic doubt – these are tax-free bonds, but by themselves do not contribute towards any tax exemption. Thus, does it make sense to calculate “Effective Yield” based on tax slab? My point is that the yield is consistent across for all investors. It would have differed if the interest were taxable.

    1. Hi Aditya,

      I dont think the REC bonds are going to list at a discount unless many investors who have applied in the issue start selling these bonds due to Fed tapering or RBI again doing something awful as per the government’s orders.

      As mentioned above also, these are effective ‘taxable’ yields. The basic idea behind quoting these effective taxable yields is to compare their yields with yields of taxable products like bank FDs, company FDs etc. Probably it is not right to mention them as effective yields, but I dont think it is wrong either to do that. Probably I am not 100% sure myself whether it is right or wrong.

      1. Thanks for prompt reply 🙂

        My views on Tax Free Bond issue:

        – Compared with Debt MFs, these bonds have benefit of a high post tax return as Dividends from MFs are taxed at 28%+ nowadays. I doubt that any MF can consistently pay more dividend than this rate for 15 years.

        – I divide my yearly investment between Debt MFs, FDs, PPFs and Bonds/NCDs. In that sense, tax free bonds are more attractive to me than instruments issued from private companies.

        – From long term capital growth I look to equity MFs instead of cumulative FDs or debt MFs. I believe debt and debt based instruments should be bought for regular interest income.

        1. Hi Aditya,

          Be it debt or equity, I always look for maximum overall total returns, whichever way it comes. Is there any investment which gives you monthly tax-free income? The answer is No. So, now after debt fund dividends getting taxed at say 28%, I think it is better to go for overall growth of your investments and liquidate any of those investments whenever you require money for liquidity.

          I think tax-free bonds are very attractive right now. These bonds are giving interests very close to bank FD interests and there is a scope of capital appreciation also. So, these bonds are excellent long-term tax-free debt investments, unless bad times take India to early 90s. I would rank only PPF closer to these bonds for fixed income investments.

  14. True. There is always a problem of demand and the price will depend on the interest rate. The benefit is the high tax free return. If one wants to sell and make profit , it will depend on timing. Small volumes will have markets and liquidity should not be a problem based on my experience.

  15. Shiv, while you’ve explained the instrument well, there is no information on premature exit. Given instrument is for 15 years, we need clarity on premature exit. Selling on BSE, where HUDCO will list, is possible. But what if you dont get good price? Or worse, there are no buyers? I tried looking on NSE/BSE for historical volumes for HUDCO’s prior similar offers – but couldnt find data. Please educate.

    1. Hi Amit,
      As Shiv mentioned the interest rate is very good for someone in 20% or 30% tax bracket. But the doubt that you have raised is very relevant. The bonds that was raised during last year is giving almost 1% or 100 BP for retail investors and quoting 50 rupees less than the face value, which is Rs 80 below the actual value considering the interest earned. If there is a further rise in interest which is not likely, the bonds will not be attractive. The only difference between FD and bond is that bond can go below the face value based on market interest rates and you may end up in loss if the bonds are sold at wrong time. But if the interest rates goes down, you may end up in profit. One will have to have long term approach in this bond and if money required urgently, then there could be some loss. Since the market is having lots of Tax free bonds issued in last 2 years, some time you may not find demand for some bonds. Taking some risk, you will get a good return and compare to many other investment the TFB is attractive for the current rates which it is offering. I have invested in last 2 years and found good market for the bonds issued in 2011-12 considering the high interest rates and there is good demand compared to last year’s bond. Since this year bonds are with high interest rates they will find a better market.

      1. Thanks for sharing George, and while you say there is strong demand for initial offers, subsequent selling by original investor remains untested, and is likely hard because of insufficient buyers. If rbi drops interest rates, sure, current bonds will be more attractive. But only in theroy, and we’re unsure if there will be enough buyers
        http://www.bseindia.com/stock-share-price/housing–urban-development-cor-%5Bhu/hudco050327/961734/# show’s HUDCO bonds thin BSE trading

    2. Hi Amit,

      Higher the interest rate, higher is the demand for these bonds issued by the same company like HUDCO or REC. Higher the demand & higher the issue size is, higher is the liquidity for these bonds.

      HUDCO tax-free bonds, issued in January 2012, had 8.20% & 8.10% coupon rates and the issue size was big at Rs. 4684.72 crore. In FY 2012-13, HUDCO could collect Rs. 2194.34 crore in its 1st issue @ 8.01% & 7.84% and only Rs. 207.01 crore in its 2nd issue @ 7.69% & 7.53%. So, liquidity is the highest with January 2012, higher with the 1st issue of FY 2013 & lowest with the 2nd issue of FY 2013.

      So, with coupon rates of 8.76%, 8.74% & 8.39% and issue size of Rs. 4,809.20 core this time, the demand & subsequent liquidity for a retail investor is bound to be there. If you want to sell 10-20-50 crore worth of bonds in a single day, you would either face liquidity problem or pricing problem.

      Here is the link from where you can get traded value/volumes of NSE-listed bonds on a daily basis:
      http://www.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.htm?cat=SEC

  16. Dear sir. Thanks. Can we apply for 20 yrs.is it risky for 20yrs?
    Thanks for formula but did not understand how effrctive yield is more than interest rate?

    1. Hi Pradeep,

      Yes, it is risky as well as rewarding to apply for 20 year bonds. Default risk is higher with 20 year bonds as compared to 10 year bonds. Reinvestment risk is higher with 10 year bonds than 20 year bonds.

      Had it been a private company like Muthoot, Manappuram, IIFL or Shriram Transport issuing bonds for 20/15/10 years, I would have definitely advised investors not to go for this long duration.

  17. How is effective yield calcuated. when the interest is not taxable , so how can effective yield be more that interest rate ? Can you share the formula.

  18. it would have been good if issue was in 1st week of october as we will get sep salary. people like me cannot apply 🙁

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