NHAI 7.60% Tax-Free Bonds – Tranche I – December 2015 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

Having gained 20-30% on their investments made in tax-free bonds a couple of years back, investors’ hunger for tax-free bonds has grown considerably. With IRFC issue worth Rs. 4,532 crore getting 2.38 times oversubscribed on the first day itself, there seems to be no slowdown in the subscription demand for these bonds.

To cash-in on this huge demand and ending a long wait for its tax-free bonds, NHAI, which filed its draft shelf prospectus in the first week of October, will be launching its first tranche of tax-free bonds from the coming Thursday i.e. 17th December. As the issue size is considerably quite big at Rs. 10,000 crore, I hope most of the retail investors are able to get their share of bonds allotted at least this time around. The issue is officially scheduled to remain opened for two weeks and will get closed on December 31st.

Before we analyse it further, let us first quickly check the salient features of this issue:

Size of the Issue – NHAI is authorized to raise Rs. 24,000 crore from tax free bonds this financial year, out of which the company has already raised Rs. 3,872 crore by issuing these bonds through a private placement. Out of the remaining Rs. 20,128 crore, the company will raise Rs. 10,000 crore in this issue.

Coupon Rates on Offer – With rising G-Sec yield, earlier IRFC and now NHAI, both have been able to offer higher coupon rates as compared to PFC and REC. While IRFC offered 7.53% for the 15-year period and 7.36% for the 10-year period, NHAI is offering an even higher rate of interest at 7.60% for 15 years and 7.39% for 10 years.

Picture 1

For the non-retail investors, these rates would be lower by 25 basis points (or 0.25%).

Rating of the Issue – CRISIL, ICRA, CARE and India Ratings consider investing in these bonds to be safe and as a result, have assigned ‘AAA’ rating to the issue. Also, these bonds are ‘Secured’ in nature i.e. in case of any default, the bondholders would carry a right to make claim on certain assets of the company.

NRI/QFI Investment NOT Allowed – Unlike PFC, REC & IRFC issues, Non-Resident Indians (NRIs) won’t be able to make investment in this issue. Qualified Foreign Investors (QFIs) are also not eligible to invest in this issue.

Investor Categories & Allocation Ratio – The investors have been classified in the following four categories and each category will have certain percentage of the issue size reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – 20% of the issue is reserved i.e. Rs. 2,000 crore

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved i.e. Rs. 2,000 crore

Category III – High Net Worth Individuals including HUFs – 20% of the issue is reserved i.e. Rs. 2,000 crore

Category IV – Resident Indian Individuals including HUFs – 40% of the issue is reserved i.e. Rs. 4,000 crore

Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.

Listing & Allotment – NHAI has decided to get these bonds listed on both the stock exchanges, National Stock Exchange (NSE) as well as Bombay Stock Exchange (BSE). The company will allot the bonds and get them listed within 12 working days from the closing date of the issue.

Demat A/c. Not Mandatory – It is not mandatory to have a demat account to apply for these bonds. Investors have the option to subscribe to these bonds in physical form as well. Whether you apply for these bonds in demat or physical form, the interest payment will still get credited to your bank account through ECS.

Also, even if you get these bonds allotted in your demat account, you have the option to rematerialize your holding in physical/certificate form if you decide to close your demat account in future.

No Lock-In Period – These tax-free bonds are freely tradable and do not carry any lock-in period. The investors may sell them at the market price whenever they want after these bonds get listed on the stock exchanges within 12 working days of the closing date.

Interest on Application Money & Refund – Successful allottees will earn interest at the applicable coupon rates i.e. 7.39% p.a. for 10 years and 7.60% p.a. for 15 years, on their application money, 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.

Minimum & Maximum Investment – Investors are required to put in a minimum investment of Rs. 5,000 in this issue i.e. at least 5 bonds of face value Rs. 1,000 each. There is no upper limit for the investors to invest in this issue. However, an investor investing more than Rs. 10 lakhs will be categorized as a high networth individual (HNI) and will get a lower rate of interest as applicable.

Interest Payment Date – NHAI will make its first interest payment on April 1st next year and subsequent interest payments will also be made on April 1 every year, except the last interest payment, which will be made to the bondholders along with the redemption amount on the maturity date.

Record Date – For the payment of interest or the maturity amount, record date will be fixed 15 days prior to the date on which such amount is due to be payable.

Should you invest in this issue?

NHAI tax-free bonds issued in February 2014 are quoting at a yield to maturity (YTM) of 7.28% with the closing market price of Rs. 1,186.53. Also, bonds issued in January 2012 are carrying 7.24% yield and last traded at Rs. 1,096 on Friday.

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Taking a clue from these already listed bonds, I think subscribing to the 15-year option makes more sense. Risk-averse investors with a long term view should definitely invest in these bonds. In the short-term as well, you can expect some listing gains with these bonds.

Application Form for NHAI Tax Free Bonds

Note: 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 NHAI tax-free bonds, you can contact me at +919811797407

332 thoughts on “NHAI 7.60% Tax-Free Bonds – Tranche I – December 2015 Issue”

  1. Shiv,
    Tax free bonds starting from 2011 until now, offer annual interest between months Oct and April. No bond offer interest between May to Sept. It would be great if few upcoming bonds offer annual interest betn May to Sept. That way we can spread our investment across diff bonds to get interest in each month. As good as getting pension every month. If you have any contacts in finance ministry then let them know this.

      1. Haha. Shiv – the way you are the first one to know about upcoming tax free issues, we assume you have some khabri there 🙂

  2. I have applied for 150 bonds for 15 years option so if I get full allotment then what interest on 1 st April I will get is it near about 3000 please give me the exact amount dear shiv thank you

  3. Dear Mr. Shiv Kukreja,
    Will it be advisable to break BANK FD’s prematurely, after they have been invested for about a year @8.75% on CUMULATIVE Basis. Have paid TDS/Tax @30% already in past FY.
    How should one calculate the overall benefit of investing thus? Please advise a simple technique to determine benefit.

    Finally, can we transfer money to wife/mother/son so that the chances if allotment are better? What should be done after allotment in such cases from tax point of view to avoid tax complications?

    Request your valuable advice please.

    Thank you.

    1. Hi SK,
      1. I think, if your FD is getting matured in January-February, then probably it is better to wait for some issue to come up during that period to invest in these bonds. But, if you have just invested in an FD, then probably it is better to break it and invest in tax-free bonds.
      2. If you want to invest more than Rs. 10 lakh, then it is better to invest in different names. Otherwise different applications don’t stand to a better chance of allotment.
      3. Please consult your tax advisor for its taxation aspects.

  4. Sir
    if i have invested 10000 for 15 years how much will be the maturity amount as i dont have knowledge in regard to annulaized return will i get the interest every year does that mean my invested amoutn will remain same or it will also be increased.

    1. The interest is typically paid out annually (in this case of NHAI @ 7.60% of your investment amount which should be Rs.760 if the principal is Rs.10000). Therefore, the maturity/redemption amount should remain the same. (Request Shiv to correct if this isn’t right)

  5. Good and useful information Shiv, as always.

    Many thanks for your good work.

    Post NHAI, is there a possibility of other issues (IREDA etc.) to be opening up soon enough?

    Regards,
    Rakesh

    1. Thanks Rakesh for your kind words!
      IREDA is yet to even file its draft prospectus, but I think HUDCO issue should get launched soon. Howevet, exact dates & details of the issue are yet to get announced. I’ll update these posts as soon I have any info about any such issue.

    2. If HUDCO were to come up with issue in Dec, the interest rate offered for 15 or 20 years will be 7.7 to 7.8%. Since the rating will be AA+, they can give 15 bps more than AAA issue.

              1. Thanks Shubh. Previous occasions they got only AA+. Now better rating and coupon will be on par with IRFC and NHAI.
                They have even shown some of the bonds issued last time also as AAA rated in their prospectus which according to me was AA+ and got upgraded AAA.

  6. Hi Shiv,

    some of my money is locked in the IRFC bond issuance. is it possible to make two applications to NHAI, one say prior to the first date of issue and another application on another day when the refund from IRFC comes due, in case it is still not oversusbscribed ? will this even be entertained and if so how will they club the applications and allotment ?

    btw, first time visitor and love your informative and relevant blogs and also the engaging comment section .

    Sai

    1. Hi Sai,
      It is possible to submit two or more applications with the same PAN no. in the same applicant’s name. Those applications will be clubbed by the Registrar on the basis of their respective PAN numbers and allotment will be made accordingly. If your second application gets made on the day the issue gets oversubscribed, then partial/pro-rata allotment will be made against that application, but you will get full allotment against your first application. I hope it satisfies your query!

      Also, thanks for your encouraging words! I hope you’ll visit our site more frequently going forward!

      1. Thanks a bunch for the reply, Shiv. i really couldn’t find this information elsewhere especially on the allotment impact and i did search hard for it. So, i sincerely appreciate your providing this kind of clarity in quick turnaround given that the issue opens tomorrow and i wasn’t quite sure about the multiple app situation. i will certainly spread the word about your blog to the extent i can.

  7. Dear Mr. Shiv Kukreja,
    Thank you for your informative & helpful write-ups. Appreciate your diligent efforts.
    Was unable to understand who exactly are QIB’S & NII’s are & what do they do/role in our markets? Why are separate categories/reservations created especially for them?

    Request you to kindly explain with illustrations & names please.
    Thank you.

    1. Thanks SK!
      In short, QIBs are institutional investors like LIC, other insurance companies and mutual fund companies, while NIIs are mostly corporates like Reliance, Infosys, TCS etc. Separate categories are created for them so that they do not eat into retail investors’ reserved portion or other category’s reserved portion. I hope it satisfies your query to at least some extent.

  8. Hello shiv. Thanks for the update and as always enjoyed your analysis.

    I had applied for the irfc bonds and my money is locked in there. Can I expect them to complete the allotment process and refund the unallotted amount before 17th ? Otherwise my money be blocked and I cannot apply for nhai bonds.

    Vinod

    1. Thanks Vinod!
      I don’t think IRFC will be able to refund your money on or before 17th. I expect them to start allotment from Friday or Monday onwards. At the same time, I do not expect NHAI issue to get oversubscribed on the first day itself. So, there is some scope of the issue remaining open by the time your money reaches your bank account.

  9. Shiv,
    Do you think there’s any chance that subsequent issues coming in the next 3-4 months will have higher rate of interest than 7.6%? Based on your response, I’ll plan my TFB-investments either totally in NHAI or will spare some for upcoming issues also.

    Again, your timely posts are so very helpful!!

  10. I am not a tax payer and I have agricultural income and I usually pay nil return but I am regularly investing in these long term bonds because they are triple rated and are long term and are better than a 20 lacks apartment that gives you 5000 rent a month about 60000 per year but these taxfree bonds are giving 152000 per year so much better than a rental income on 20 lacks investment and the interest will be direct credited to your bank account where as in a rental income you have to go and collect rent every month and also some rental income may be reinvested to maintenance of apartment but in taxfree bonds no maintenance costs no paperworks and a secure taxfree income for along term so what do say dear shiv

    1. Hi Nitesh,
      You are comparing Apples with Oranges here. Real estate investment, equity investment, fixed income investment and gold investment, all have their own characteristics & cycles. Current real estate & fixed income scenario do favour fixed income investment over real estate investment. But, that is not always be the case.

      Real estate & equity investments offer low income yield, but carry high capital appreciation scope. However, fixed income investment offer high income yield, but low capital appreciation scope. In the long term, equity, real estate as well as gold investments generate higher returns for the investors as compared to fixed income investments. At the same time, volatile asset investments are not for the weak-hearted people and require active research/follow-up by their investors.

  11. Dear Shiv,
    I am an NRI living in UAE. Is there any way I can invest in NHAI bond, may be thru resident family member in India? will highly appreciate your advice.

  12. Whether there will be Tranche II from NHAI, this financial year? If this happens, I expect more coupon rate for next Tranche as FED will increase interest rates this week. This might have some impact on GILT.

    1. Hi Amit,
      I don’t think Fed rate hike will impact Indian bond yields much as this event is already factored in by the markets. Indian markets will be driven more by the local issues now as compared to the global factors. Tranche II will definitely come in the new calendar year and I think it will carry a lower rate of interest.

  13. Dear Mr. Shiv Kukreja,

    Thank you for the excellent & informative write-up.

    Request you to kindly share such valuable information as early as possible, since arranging the funds at short notice is a major challenge.

    Strangely, there are no advance advertisements in leading newspapers by the TFB’ s issuers. Hence, most small investors are uninformed & are in the dark about such TFB’s Issues.

    Thank you.

    1. Thanks S.K. for your kind words!
      Tax-free bonds are in demand these days, so the issuers do not feel the requirement to publicise them any more. That is why no ads get published these days.

      However, I always try to share the info about these issues as soon as I get the details. I got the details about NHAI issue on Friday evening & shared it here in the night itself. However, it takes me time to analyse these issues and write a post. Still I’ll try to post these articles as soon as possible going forward. Thanks!

    2. SK , Shiv updated about this TFB much before any site including that of NHAI published. Definitely advance info will be good, but we were discussing about this issue for quite some time.

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