PFC 8.92% Tax-Free Bonds – October 2013 Issue

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

‘AAA’ rated REC issue offered 8.71% to its investors, ‘AA+’ rated HUDCO issue fixed it at 8.76% and then ‘AAA’ rated IIFCL issue managed to cross REC’s peak rate of interest with 8.75%, but now it is the turn of Power Finance Corporation (PFC) to surpass all previous rates to set this year’s highest interest rate on its tax-free bonds by offering 8.92% for a 20-year duration.

PFC would be the fourth company to launch its public issue of tax free bonds this year from Monday i.e. October 14th. The issue would run till fifth Monday i.e. November 11th. But, the company may extend it or preclose it, depending on the investors’ response to the issue.

Interest rates offered by PFC are the highest rates for all three tenors. PFC has set its coupon rates at 8.92% per annum for 20 years, 8.79% per annum for 15 years and 8.43% per annum for 10 years. This jump is due to a rise in the benchmark G-Sec rates in the last 10-15 trading days, after the Repo Rate hike by the RBI.

Size of the Issue – PFC has been authorised to raise Rs. 5,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 1,124.10 crore through a private placement on August 30th. The company plans to raise the remaining 3,875.90 crore from this issue, with the base issue size of Rs. 750 crore and the green-shoe option of Rs. 3,125.90 crore.

Like REC, if this issue gets subscribed to the tune of Rs. 3,875.90 crore, it will be the last issue of PFC this financial year.

Green Signal for NRIs – After IIFCL not allowing NRIs and QFIs to invest in its issue, PFC has decided not to do that. NRIs, on repatriation basis and on non-repatriation basis, are eligible to invest in this issue. Qualified Foreign Investors (QFIs) are also eligible to participate in this issue.

No Lock-in Period – Many people have been asking me about the lock-in period of these tax-free bond issues, but I don’t know how I missed to mention it here in all my previous posts that there is no lock-in period with these tax-free bonds. If you subscribe to these bonds in demat form, you can sell them anytime you want after their listing on the stock exchange.

These are not tax saving bonds, like 80CCF Infrastructure Bonds or 54EC Capital Gain Tax Saving Bonds, which carry a lock-in period of five years and three years respectively.

Listing – PFC will get these bonds listed only on the Bombay Stock Exchange (BSE). Investors can apply for these bonds either in demat form or in physical form, as per their choice. The company will get the bonds allotted and listed within 12 working days from the issue closing date.

Rating of the issue – Three credit rating agencies, CRISIL, ICRA and CARE have rated this issue and all of them have rated it as ‘AAA’, which is their highest rating to any debt issue. Also, these bonds are ‘Secured’ in nature against certain assets of the company.

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

  • Category I – Qualified Institutional Bidders – 15% of the issue is reserved
  • Category II – Non-Institutional Investors – 20% of the issue is reserved
  • Category III – High Networth Individuals including HUFs, NRIs & QFIs – 25% of the issue reserved
  • Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue reserved

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 on Application Money & Refund – PFC will pay interest to the successful allottees on their application money at the applicable coupon rates, from the date of realization of application money up to one day prior to the deemed date of allotment. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Factors favouring investment in this PFC Issue…

* Highest Coupon Rates – Thanks to a sudden spike in the G-Sec yields in the last 10-12 trading days since the RBI raised the Repo Rate in its monetary policy of September 20th, PFC has been to offer the highest interest rates of the current financial year. I think with 8.92% or 8.79% tax-free rates, investors in the 30% or 20% tax brackets would not even think of going for a bank FD @ 9%.

* RBI cutting the MSF Rate – RBI has cut the MSF Rate by 50 basis points to 9% a couple of days back. The idea was to reduce liquidity crunch in the banking system and help banks in reducing their cost of overnight (very short-term) borrowings and also normalize the yield curve. This move makes market participants believe that the RBI will try to cap the rise in overall interest rates as much as possible.

* Fall in G-Sec Yield – As a result of the RBI’s move to cut the MSF Rate, the 10-year G-Sec yield has fallen from 8.68% to 8.46% in the last couple of days. If this fall is not temporary and continues for a little longer time, you would see a fall in the coupon rates of the upcoming tax-free bond issues.

* Postponement of QE3 Tapering & US Shutdown – US Federal Reserve’s decision to postpone QE3 tapering and a partial shutdown in the US have resulted in a fall in the 10-year bond yield there from 3%+ to 2.64% today. This should also keep the sentiment somewhat healthy here in the Indian bond market.

* Steep fall in September Trade Deficit – With a fall in gold & oil imports and a surge in exports, the Ministry of Commerce today announced a steep fall in our September trade deficit. The problem, which was becoming too burdensome for our economy, is finally getting controlled. This should strengthen the value of Indian rupee against the US dollar in the coming days and the bond yield should also move lower.

Factors against this PFC Issue – Though there are not many factors which come to my mind against this issue, but overall things are not very bright for the power financing sector here in India. PFC, REC and PTC India Financial Services are some of the companies which have been struggling to get their money back which they have been lending to the state electricity boards (SEBs) over the years.

These kind of events have resulted in its share price falling from Rs. 350+ during 2010-11 to below Rs. 100 this year and I think stock price performance is a good barometer to check a company’s current financial health and future prospects. So, this is one thing which you should consider before investing your money in this issue.

With PFC offering relatively higher interest rates and NHPC issue hitting the market only in the third week, I would prefer to invest my money in this issue as compared to HUDCO and IIFCL issues. With so many positives and a possible fall in inflation & interest rates, I think PFC’s rates would be the highest coupon rates offered by any ‘AAA’ rated issuer this financial year.

Application Form of PFC Tax Free Bonds

As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in PFC tax-free bonds, you can contact me at +919811797407

224 thoughts on “PFC 8.92% Tax-Free Bonds – October 2013 Issue”

  1. Thanks for the prompt reply. I have 1 follow up question:- The deemed date of allotment will be the day these bonds list, or 1 day prior to listing? Or will the deemed date be the date these bonds get credited in the demat a/c of individual retail investors? Usually, bonds get credited over a period of 2-3 days to different retail investors and I am assuming that there can be only one record date for the entire issue

    1. Let me answer this question with an example – Deemed date of allotment is always fixed prior to the date of listing. In the case of REC issue, the bonds got credited in the demat accounts on September 27th, got listed on September 30th, whereas the deemed date of allotment is September 24th.

    1. Hi Simple,

      For PFC, the interest payment date will be exactly 1 year from the deemed date of allotment and the record date will be 15 days prior to the interest payment date. e.g. if the first interest payment date is November 15, 2014, then the record date will be November 1, 2014.

  2. The total subscription has crossed the limit but I see Category IV is still undersubscribed.
    Can I invest in Category IV on Monday 28-Oct and expect an allotment? Checking if it is worth breaking my FD to subscribe to the issue.

      1. Thanks for all your help, Shiv.

        I don’t think there is any site as comprehensive as this one for the Tax Free bonds being issued in India

    1. Dear TCB,

      Listing is too far for PFC bonds, let the RBI announce its credit policy & let the CAD & inflation numbers pour in next month. In the current situation, it should not be more than Rs. 10 per bond.

  3. Day 9 (October 25th) subscription figures:

    Category I – Rs. 455 crore as against Rs. 581.38 crore reserved
    Category II – Rs. 1,241.07 crore as against Rs. 775.18 crore reserved
    Category III – Rs. 1,026.31 crore as against Rs. 968.98 crore reserved
    Category IV – Rs. 1,188.06 crore as against Rs. 1,550.36 crore reserved
    Total Subscription – Rs. 3,910.45 crore as against total issue size of Rs. 3,875.90 crore

  4. Day 8 (October 24th) subscription figures:

    Category I – Rs. 455 crore as against Rs. 581.38 crore reserved
    Category II – Rs. 1,241.02 crore as against Rs. 775.18 crore reserved
    Category III – Rs. 1,021.60 crore as against Rs. 968.98 crore reserved
    Category IV – Rs. 1,105.57 crore as against Rs. 1,550.36 crore reserved
    Total Subscription – Rs. 3,823.19 crore as against total issue size of Rs. 3,875.90 crore

  5. Dear Shiv,

    In this year I have purchased REC and IIFCL bonds (2 Lakh each). I have 6 Lakh more which would like to invest in other tax free bonds. Is PFC still open for purchase? Also let me know whether PFC would be a good option or not (as REC is also from same field). Or I should wait for IRFC or others? Can you please let me know who else are likely to offer tax free bonds in this financial year?

    Debasis

    1. Dear Debasis,

      Yes, PFC is still open for purchase. Till date it has got subscription worth Rs. 1,105.57 in the retail investors category out of Rs. 1,550.36 reserved.

      Though it is better to avoid exposure to two companies in the same sector, it is totally your call whether you want to wait for other companies’ issues or not. There are 8 more companies which have been allowed to raise money from TFBs this financial year. Please check this link to know all those companies:

      http://www.onemint.com/2013/08/16/tax-free-bonds-notification-fy-2013-14/

  6. Shiv Sir,
    I have applied for 46 number of PFC tax free bonds amounting 46,000/- on 22-Oct 2013 as I have only that much of money that day. Now I have arranged 40,000/= more on 23-Oct 2013. When I apply through ICICIDIRECT I am not able to invest as the message shows one application per account.

    Please tell me whether it is possible to top up or not. If yes, how to proceed.

    NR Bhatta

    1. Hi Nawraj,

      Yes, it is possible to put multiple applications in the same name under same PAN no. If you’ve another demat account, then you can apply for it online. Otherwise, you can apply for it in physical form. If you require any assistance in applying for it in physical form, just let me know.

  7. Day 7 (October 23rd) subscription figures:

    Category I – Rs. 385 crore as against Rs. 581.38 crore reserved
    Category II – Rs. 1,240.81 crore as against Rs. 775.18 crore reserved
    Category III – Rs. 1,011.53 crore as against Rs. 968.98 crore reserved
    Category IV – Rs. 1,018.74 crore as against Rs. 1,550.36 crore reserved
    Total Subscription – Rs. 3,656.09 crore as against total issue size of Rs. 3,875.90 crore

  8. What is the status of PFC Bond and NHPC BOnds issue ?

    I would like to know whether they are still open or close ?

    1. NHPC issue has got closed today but PFC issue is still open. Retail investors category is subscribed to the tune of Rs. 1,018.74 crore as against Rs. 1,550.36 crore reserved. I think PFC will not close the issue till the time it gets fully subscribed in the retail investors category.

  9. Day 6 (October 22nd) subscription figures:

    Category I – Rs. 385 crore as against Rs. 581.38 crore reserved
    Category II – Rs. 1,230.86 crore as against Rs. 775.18 crore reserved
    Category III – Rs. 1,002.81 crore as against Rs. 968.98 crore reserved
    Category IV – Rs. 926.59 crore as against Rs. 1,550.36 crore reserved
    Total Subscription – Rs. 3,545.26 crore as against total issue size of Rs. 3,875.90 crore

  10. Day 5 (October 21st) subscription figures:

    Category I – Rs. 360 crore as against Rs. 581.38 crore reserved
    Category II – Rs. 1,223.69 crore as against Rs. 775.18 crore reserved
    Category III – Rs. 988.72 crore as against Rs. 968.98 crore reserved
    Category IV – Rs. 821.27 crore as against Rs. 1,550.36 crore reserved
    Total Subscription – Rs. 3,393.68 crore as against total issue size of Rs. 3,875.90 crore

  11. As per your information both PFC and NHPC Tax free Bonds will close early latest by Tuesday.
    And I think in PFC Category II I will not get the full Bond of Rs. 10 Lac. And also in NHPC also because of oversubscribing in Category II [ AOP Trust ]
    So i would like to know is there and other good Tax Free Bonds are coming in near future.

    1. Not sure about PFC, but I think NHPC should get closed latest by Tuesday or Wednesday. As you must be knowing by now, 13 companies have been allowed to raise money through these tax-free bonds, out of which 5 companies have done it so far. So, the remaining 8 companies would do that in the coming 5 months.

      I think National Housing Bank (NHB) is up next in the queue, but it has not even filed its Draft Shelf Prospectus as yet. So, I expect next issue to hit only after Diwali holidays.

  12. i am applying on Saturday morning.. can i expect full allotment..?
    As i prefer PFC over NHPC.
    pls advise.
    thanks..

    1. Hi Harshad,

      You can apply for it online with your online trading A/c. if you have any or else you’ll have to fill the physical application form. For the 2nd option, I can assist you in applying for these bonds. If you want, let me know.

  13. Day 4 (October 18th) subscription figures:

    Category I – Rs. 360 crore as against Rs. 581.38 crore reserved
    Category II – Rs. 1,223.30 crore as against Rs. 775.18 crore reserved
    Category III – Rs. 977.84 crore as against Rs. 968.98 crore reserved
    Category IV – Rs. 665.81 crore as against Rs. 1,550.36 crore reserved
    Total Subscription – Rs. 3,226.95 crore as against total issue size of Rs. 3,875.90 crore

  14. Thanks for replying instantly.
    You know why i am asking you about the over subscribed Bond , if Category II is over subcribed in PFC Bond , and there are chances of not getting the full Bonds of amount which I applied , then I will apply in NHPC Bond which start from 18 th October
    Earliest I can apply on Tuesday and latest by Wednesday

    1. I am expecting NHPC issue to get fully subscribed in all the categories tomorrow itself and the issue to get closed either on Monday or Tuesday. Let’s see what happens tomorrow.

  15. I would like to know suppose Category II is oversubscribed and by the end of issue closing date in any other category which is not fully subscribed , they can give [ transfer ] that Bond quantity to the category II applicant
    in PFC bond as on to-day Category II is oversucribed. and in category I and IV not fully subscribed.
    In this Bond issues they consider first come base or after completing the issue they will allot after dividing the no. of Bonds applied.

    1. Now I got your query Paresh, but I think it is too early to do all these calculations based on such permutations & combinations. You please put the same query here either on the day of your investment or when PFC announces early closure of this issue.

      But still in the current scenario and based on expected subscription numbers, I think the chances of getting allotment in Category II by making investment on 23rd are not very bright. I think the company would like to close this issue on Tuesday or Wednesday or maximum by the end of next week.

  16. Hi Shiv
    I want to invest from my AOP [ Association of Person ] Trust a/c. So in y ind AOP – Trust go in to Category II.
    So please tell me AOP is in which category

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