Author: Shiv Kukreja

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

Indian Railway Finance Corporation Limited (IRFC) will be the next company to launch its tax-free bonds this financial year from January 21st. The company plans to raise Rs. 1,000 crores from this issue with an option to retain oversubscription up to Rs. 8,886.40 crores.

This will be the second such issue by IRFC as the company issued tax-free bonds last year also. The issue will close on January 29th, coincidently on the same day on which the RBI is scheduled to announce its monetary policy.

Investors who want to invest in these tax-free bonds for their higher effective yields, I think this is the last such opportunity this financial year. I am saying this because IRFC was among those few companies which filed their final prospectus in December when the yield on the 10-year government securities was higher at around 8.15-8.20%. It has fallen by 35-40 basis points (or 0.35-0.40%) since then.

As the interest rates offered by these companies are linked to the benchmark government securities, the upcoming tax-free bond issues are going to offer lower rate of interest and hence, will be very unattractive.

As most of these tax-free bonds are quite similar in their regular features, here are some of the unique features of this issue:

Interest Rate

IRFC is offering 7.84% per annum for its 15-year option and 7.68% per annum for the 10-year option to the retail investors investing up to Rs. 10 lakhs. Again, the additional incentive of 0.50% will be payable to the original allottees only who invest in these bonds during this offer period. In case these bonds are sold or transferred by the original allottees, except in case of transfer of bonds to legal heir in the event of death of the original allottee, the coupon rates will be revised downwards to the base coupon rates.

As with all of these issues, the interest rate for the other categories of investors, like QIBs, corporates and HNIs, will be 0.50% lower than the above rates offered to the retail investors. For 15 years, it will be 7.34% per annum and for 10 years, it will be 7.18% per annum.

NRI Investment: Like HUDCO tax-free bonds, NRIs can also invest in this issue, but only non-US based NRIs. They can apply for these bonds both on repatriation basis as well as non-repatriation basis. Eligible NRIs can use their NRE/NRO/FCNR/NRNR/NRSR account to invest in this issue but will be required to get a bank certificate made to confirm that the money has been used out of an NRE/NRO/FCNR/NRNR/NRSR account. If the NRI is a Person of Indian Origin (PIO), then it is mandatory to attach the copy of the PIO card.

Other Terms of the Issue

The issue is secured in nature and has been rated ‘AAA’ by CRISIL, ICRA and CARE. The bonds will get listed within 12 working days post closure of the issue on both the national exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Like its first issue last year, IRFC has fixed October 15th as the interest payment date for this issue as well. The investors have the option to apply for these bonds either in the demat form or physical form and thus, demat account is not mandatory to apply for these bonds.

40% of the issue is reserved for the retail investors, another 20% of the issue is reserved for the high net worth individuals (HNIs) i.e. for the individual investors investing above Rs. 10 lakhs. 20% of the issue is reserved for the institutional investors and the remaining 20% is for the corporate investors.

The minimum amount of application is Rs 5,000 with face value of Rs 1,000 per bond. The allotment will be made on first-come-first-serve basis.

About IRFC

Indian Railway Finance Corporation Limited (IRFC) is a wholly-owned public sector undertaking (PSU) and works as a financial arm of Indian Railways. It is also registered with the RBI as Infrastructure Finance Company-NBFC (IFC-NBFC). IRFC has strong asset quality zero gross and net non-performing assets (NPAs) as on March 31, 2012.

The proceeds raised from the issue will be utilised by the company towards financing the acquisition of rolling stock that will be leased to the Ministry of Railways and for funding other projects approved by the Ministry of Railways.

As mentioned above, interest rates have fallen by around 0.35-0.40% in the last few days and going by this trend, the upcoming issues of tax-free bonds will offer lower rate of interest. As much anticipated, if the RBI decides to cut interest rate this time on January 29th, the bond yields should fall more from these levels.

So, it is highly recommended now for the investors in the higher tax brackets to use this opportunity to invest their money either in the ongoing HUDCO tax-free bonds which offer the highest interest rates or in this issue which is rated higher at ‘AAA’.

Click here to download the application form

Power Finance Corporation (PFC) will be launching the second public issue of tax-free bonds this financial year (FY 2012-13) from the coming Friday, December 14th, 2012. The company plans to raise Rs. 1,000 crore in this issue with an option to retain oversubscription to the tune of Rs. 3,590 crore, making the total size of the issue to be Rs. 4,590 crore.

PFC plans to use the proceeds for company’s lending purposes, debt servicing and
working capital requirements, subject to the terms and conditions of the CBDT Notification.

Details of the Issue

Categories of Investors

As with all these issues, the investors would be classified in the following four categories:

Category I – Qualified Institutional Buyers (QIBs)
Category II – Non-Institutional Investors (NIIs) or Corporates
Category III – High Net Worth Individuals (HNIs)
Category IV – Retail Individual Investors (RIIs)

40% of the issue is reserved for the retail investors, another 20% of the issue is reserved for the high net worth individuals (HNIs) i.e. for the individual investors investing above Rs. 10 lakhs. 25% of the issue is reserved for the institutional investors and the remaining 15% is for the corporate investors.

Rate of Interest/Coupon Rate

There is not much difference between this issue and the REC bonds issue which closed on Monday, December 10th. PFC will pay a base coupon rate of 7.36% and 7.19% per annum to the Category I, II and III investors with a maturity period of 15 years and 10 years respectively.

As with the REC bond issue, PFC will also pay an additional coupon of 0.50% p.a. to the retail investors over and above the base coupon rate, making it 7.86% and 7.69% per annum respectively. Interest will be payable annually as there is no cumulative interest option.

But, the additional incentive of 0.50% will be payable to the original allottees only who invest in these bonds during this offer period. In case these bonds are sold or transferred by the original allottees, except in case of transfer of bonds to legal heir in the event of death of the original allottee, the coupon rates will be revised downwards to the base coupon rates.

The interest earned will be exempt from tax under section 10 (15)(iv)(h) of the Income Tax Act, 1961.

Retail investors can invest up to Rs. 10 lakhs in the issue and still get the additional coupon of 0.50%. The company has decided to keep the minimum investment requirement of Rs. 5,000 (or 5 bonds of face value Rs. 1,000).

Listing, Safety and other features of the Issue

Demat account is not necessary to invest in these bonds. Investors have been given the option to apply these bonds in physical form also. Like last year, PFC bonds are going to list only on the Bombay Stock Exchange (BSE).

NRIs and foreign nationals among others are not eligible to invest in this issue. The allotment will be made on a “first-come-first-served” basis.

The issue has been rated ‘AAA’ by CRISIL and ICRA. The issue is secured in nature and in the event of default, the bondholders can claim a charge upon the assets of the company in connection with these bonds.

The issue will close on December 21st, 2012. The bonds will get allotted and listed within 12 working days from the closing date of the issue.

How 7.86% is fixed and will the forthcoming tax-free bond issues carry higher rate of interest?

This financial year, there is a ceiling on the coupon rates these companies can offer based on the reference Government Securities (G-sec) rate. The coupon rate for ‘AAA’ rated issuers cannot be more than the reference G-sec rate minus 65 basis points (bps) or 0.65% in case of retail investors and G-sec rate minus 115 bps or 1.15% in case of QIBs, corporates and HNIs.

The reference G-Sec rate is the average of the base G–sec yield for equivalent maturity reported by the Fixed Money Market and Derivative Association of India (FIMMDA) on a daily basis prevailing for two weeks ending on the Friday immediately preceding the filing of issue’s prospectus with the designated stock exchange and the Registrar of Companies (RoC).

So, if the 10-year benchmark G-sec rate is 8.17% p.a. payable semi-annually, the reference G-sec rate would be equal to (((1+(0.0817/2))^2) – 1) * 100 = 8.34% p.a. Hence, 65 bps less than 8.34% p.a. is 7.69% p.a. payable annually.

Keeping this ceiling and slow economic growth into consideration, I do not think the future tax-free bond issues would be able to carry a higher rate of interest. In fact any interest rate cut by RBI due to an unexpected and further fall in economic growth would force the issuers to lower their coupon rates.

About Power Finance Corporation Limited

Power Finance Corporation is a listed Government of India undertaking with 73.72% stake held by the govt. The company provides financing to state electricity boards (SEBs), state generating companies and independent power producers (IPPs) for a range of power-sector activities including generation and distribution.

Performance of the PFC tax free bonds issued last year

Tax free bonds issued last year have given quite handsome returns to the investors in the range of approximately 15%-20% annualised. PFC tax free bonds closed at Rs. 1,086.10 on December 11th, 2012 carrying a YTM of 7.43%. These bonds paid a mid-year interest also on October 15th, 2012.

Given the current YTM of 7.43%, the rate of interest of 7.86% or 7.69% is still attractive for the retail investors in the 30% or 20% tax bracket with medium-term to long-term perspective.

REC has got a good response for its bond issue from the retail and HNI investor categories, probably because it was the first issue of these popular tax-free bonds. The timing of PFC issue is interesting as the RBI will be announcing its next monetary policy measures on December 18th. In case there is a rate cut by RBI, then the issue will become quite attractive for the retail investors and they can expect an appreciation in the market price of these bonds.

Click here to download the application form

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

I was reading an article a few days back which had the headline “Why one should book profit in existing tax-free bonds and invest in new issues” and a couple of financial experts shared their views that investors should book profits in the existing tax-free bonds and invest the sale proceeds in the new issues like the currently running REC tax-free bonds.

Sanjay Shah raised a similar query here yesterday. This is what he had to say:

Sanjay Shah December 3, 2012 at 5:33 am

Hi Manshu / Shiv,

I had been allotted 1,000 bonds of REC in it’s March 2012 issue. Period is 15 years carrying an interest of 8.12% (HNI category). It’s currently listing at a premium of 9%. Given that I am in the 20% tax bracket and that the sale of the REC bonds will mean profits earned will be added to my income, plus 0.5% brokerage charge, do you recommend I sell those and re-invest in this issue? (and thus replace myself in the Retail category).

Additionally, I had been allotted 336 bonds of PFC in it’s February 2012 issue. Period is 10 years carrying an interest of 8.2% (HNI category). It’s currently listing at a premium of 6%. Given that I am in the 20% tax bracket and that the sale of the PFC bonds will mean profits earned will be added to my income, plus 0.5% brokerage charge, do you recommend I sell those and re-invest in this issue? (and thus replace myself in the Retail category, plus net a 15 year bond instead of a 10 year bond).

I had invested in the earlier bonds with a view of keeping them till end of tenure and the same holds true this time as well. However, I don’t have enough funds to remain invested in all three issues and hence need to decide if I should shift which series I am invested in.

Thanks in advance.

Here is what Manshu had to say in response:

Manshu December 3, 2012 at 7:11 am

Based on your situation I don’t see any value in selling and shifting to a lower interest bearing bond. If anything, the decline in interest rates will mean that the premium on your existing bonds go up even more.

Here is what I had to say in response:

Shiv Kukreja December 3, 2012 at 4:45 pm

Hi Sanjay… If I were at your place, with funds limited for two investments only, I would have kept my investments in the old tax free bonds only. This is because of two reasons – first, if you sell your old bonds in the markets now, you’ll have to pay STCG tax on the capital gains made till date as per your income tax slab. Second, the market value for these new bonds would be as per the yield to maturity (YTM) for the new buyer and not as per 7.88% or 7.72%.
But, if you can manage to hold your old bonds for 2-4 months more till your investments complete one year and you also manage to buy and hold the new bonds till their maturity, then probably it makes sense to try replacing yourself in the Retail category. This would result in a YTM of 7.88% or 7.72% for you. Am I clear to you or was it too complicated?

Taking from there, I have a view that if you are in 30% or 20% tax bracket, it is not a great idea to invest in this year’s tax-free bonds with the proceeds from the sale of last year’s tax-free bonds. Firstly, you will have to pay short-term capital gain (STCG) tax as per your income tax slab. So, your returns would effectively get reduced by the STCG tax you pay and also by the brokerage you pay when you sell your existing bonds.

Secondly, as all new issues will carry the “Step Down” feature and the buyers of these bonds in the secondary markets will not get the additional coupon rate of 0.50% per annum, these new tax-free bonds will always trade at a market price factoring into the reduced coupon rate.

Also, as Manshu pointed out, the decline in interest rates will mean that the premium on your existing bonds go up even more. This is because the existing REC tax-free bonds are already trading at a higher yield to maturity (YTM) of 7.49% as compared to the original coupon rate of 7.38%. So, if the yields of both these bonds are equal, then either the old tax-free bonds will appreciate in value or the new tax-free bonds will fall in value.

In what situation or when should you book profits in the old tax-free bonds?

1. If an investor wants to book profits, he/she should do that either after completion of 1 year from the date of allotment or after the next ex-interest date. Investors in the 30% or 20% tax bracket can save their tax outgo by selling these bonds after a year and pay only 10% flat long-term capital gain (LTCG) tax on these listed bonds. Moreover, the market price of these bonds fall two days before the ex-interest date. So, one can sell these bonds after this date to minimise their tax outgo.

2. If you are 100% certain that you will hold these bonds for more than 7-10 years, then also you might think of selling the existing bonds. But, there would not be extraordinary gains out of it.

Many of the brokers might encourage you to sell your existing investments in tax-free bonds to invest in the new tax-free bonds. I would say you should do your homework first and your objectives must be clear before you follow your broker.

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

Many of the investors have been waiting for the tax-free bonds to be issued during 2012-13. In the annual budget in March this year, the former Finance Minister, Pranab Mukherjee, had proposed tax free bonds to the tune of Rs. 60,000 crore for the companies in the infrastructure development or infrastructure finance space.

After waiting for more than seven months, the wait seems to be coming to an end. The notification for the tax free bonds for financial year 2012-13 has been released by the Ministry of Finance on tuesday, November 6th. Here is the Taxmann link to the notification.

NHAI, IRFC, PFC, REC and HUDCO have been allowed to issue these bonds again this year and IIFCL, NHB, JNPT, Dredging Corporation and Ennore Port will be the new entrant issuing these bonds this year. These bonds will be issued for 10 years, 15 years or 20 years. IIFCL is the only company among the ten companies which has been allowed to issue these bonds for 20 years.

Like it is done in most of the bond issues, the investors would be classified in the following four categories:-

1) Retail Individual Investors (RIIs)
2) Qualified Institutional Buyers (QIBs)
3) Corporates
4) High Net Worth Individuals (HNIs)

Most importantly, the definition for the “Retail Individual Investors” has been modified. As per the notification, Retail Individual Investors would mean those individual investors, Hindu Undivided Families or HUFs (through Karta), and Non Resident Indians (NRIs), applying for upto Rs. 10 lakhs in each issue. Individual investors investing more than Rs. 10 lakhs will be classified as High Net Worth Individuals (HNIs).

Last year, the limit for the retail investors was Rs. 5 lakhs and if you remember, REC had set the limit at Rs. 1 lakh earlier and then reset it back to Rs. 5 lakhs when the issue got a poor response on the first day of its offer period in the retail investors category.

Like last year, there would be an applicable ceiling on the coupon rates offered by the issuer companies, based on the reference Government security (G-sec) rate. The ceiling coupon rate for ‘AAA’ or ‘AA+’ rated issuer companies will be 65 basis points (or 0.65%) less than the reference G-sec rate in case of Retail Individual Investors and 115 basis points (1.15%) less than the reference G-sec rate in case of other investors like Qualified Institutional Buyers (QIBs), Corporate and High Net Worth Individuals (HNIs).

In case of issuer companies having credit rating of ‘AA’ or below, the ceiling coupon rate will be 50 basis points less than the reference G-sec rate in case of Retail Individual Investors and 100 basis points less than the reference G-sec rate in case of other investors.

Retail investors would be eligible to a higher rate of interest to an extent of 50 basis points. The higher rate of interest, applicable to the retail investors, will not be available in case the bonds are transferred, except in case of transfer to legal heir in the event of death of the original investor.

As per the notification – “The reference G-sec rate would be the average of the base yield of G-sec for equivalent maturity reported by Fixed Income Money Market and Derivative Association of India (FIMMDA) on a daily basis (working day) prevailing for two weeks ending on Friday immediately preceding the filing of the final prospectus with the Exchange or Registrar of Companies (ROC) in case of public issue and the issue opening date in case of private placement”.

Last year, Central Board of Direct Taxes (CBDT) had stipulated that in case of public issue, the interest rates on these bonds were not to be less than 50 basis points lower than the yield on government securities of equivalent residual maturity as reported by FIMMDA on the last working day of the month preceding the month of issue of bonds. Also, the same formula was applicable to all categories of investors. So, this year the differential gap between the interest rate for the retail investors and the interest rate for other investors has been increased to 50 basis points.

If the issuer entity has been rated by two rating agencies and their assigned ratings are different, in that case the lower of the two ratings will be applicable to the issuer company and accordingly, the company might be able to offer a higher coupon rate.

In case the issuer company decides to make the interest payments semi-annually, it will have to lower the coupon rate by 15 basis points or 0.15%.

The companies are allowed to issue these bonds either through public issues or private placements. As per the notification, at least 75% of the authorised amount of bonds issued by each entity will have to be raised through public issues. For instance, NHAI and JNPT will have to raise at least Rs. 7,500 crore and Rs. 1,500 through public issues respectively.

The maximum issue size in each tranche of a private placement can only be Rs. 500 crore. In case of public issues, 40% of each such issue will be reserved for the retail investors category.

Last year, these tax free bond issues got a super response and off late, all these bonds have given a very handsome returns to the investors. With the interest rates falling this time around, it seems to me that the bonds already listed on the exchanges would still remain in high demand. Lets see which company comes out with the first bond issue this time.

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
Tax Saving Infrastructure Bonds u/s 80CCF were in high demand last year. As many as twelve infrastructure bond issues came for subscription and many of the investors just kept seeking more information about their investments.

Now the investments are about to complete their first year and many of the investors are now wondering when they will receive the first interest payments and whom to contact in case they do not get it by the due date.

Vivek suggested the other day to write a post carrying the interest payment dates of infrastructure bonds, the same way we had it for the Tax-Free Bonds issued last financial year.

Author: vivek
Comment:
Can you please publish the various interest payment dates for various 80CCF bonds the way you have published for the Tax savings bonds? That way it would be helpful for all of us who have purchased these bonds.

Here is the table carrying the same for all of the infrastructure bonds issued last financial year, in the chronological order of their issue opening dates.

Infra Bonds in Demat Account – If you had taken these Infra Bonds in your demat account, then the company will credit the interest payment directly in your bank account which is presently linked to your demat account.

Infra Bonds in Physical Form – If you had taken these bonds in the physical form, then you must have given a cancelled cheque of your bank account along with your PAN card copy and the address proof. The company will credit the interest payment directly in the same bank account of which you gave the cancelled cheque.

If you have any query regarding any of your interest payment related issues, you can contact the respective Registrar at the contact number or the email id mentioned in the table. If, for any reason, you want to change the bank details in your investments, then also you need to contact the respective Registrar and seek the New Bank Mandate Form.

Once you are ready to send the duly filled form to change the bank details, don’t forget to attach a cancelled cheque leaf and photo ID proof along. Once the details get changed, the Registrar itself will intimate you regarding the change.