Indian Railways Tax Free Bond Details

Indian Railways announced the details of their tax free bond issue, and Shiv emailed me the term sheet today.

There is one new and interesting thing about this offer which I’ll come to in a while but before that let’s take a look at the other regular details of these bonds.

There will be two series – one with a 10 year maturity, and the second one with the 15 year maturity, and the interest on both options will be paid annually.

The issue is going to open on January 27th 2012 and is planned to close on the February 10 2012. You have to invest a minimum of Rs. 10,000 and since one bond has a face value of Rs. 1,000, you can invest in Rs. 5,000 multiples after that.

The issue size is Rs. 6,300 crores and the issue has been rated CRISIL AAA and CARE AAA by CRISIL and CARE respectively; this of course is their highest rating. ICRA has rated it AAA as well.

30% of the issue is reserved for the retail investors and this is important because retail investors will get a higher interest rate than other class of investors. An individual investing less than Rs. 5 lakhs will fall under the retail category.

The bonds will also list on the NSE and BSE.

Here are the details of the issue in a snapshot.

Option Series I Series II
Face Value Rs. 1,000 Rs. 1,000
Minimum Investment Rs. 10,000 Rs. 10,000
Tenor 10 years 15 years
Interest Rate: Retail Investors 8.15% 8.30%
Interest Rate: Other Investors 8.00% 8.10%
Interest Payment Annual Annual

As you can see the interest rate that retail investors get is a tad higher than the other categories and they have put in a condition to say that only the first allottee will get the higher rate. So, if you want the higher interest you must subscribe to the issue. If you buy it from the stock exchange then you will not get the retail investor interest rate even if you are a retail investor. You will get the lower interest rate.

This is a clever way of first of all giving an incentive to retail investors to subscribe to the issue and then reduce the overall interest burden because some people will end up selling the bonds in the market and then Indian Rail will not have to pay the higher interest rate for them.

I think this should speed up the subscription of the retail part which was lagging so far in the other issues, and I think this will catch the interest of NRIs as well who can invest in these bonds under either category.

The tax free offers that are coming out right now are fairly good deals and if you are looking for fixed income products then you can consider this issue.

 

Update: Corrected the face value from Rs. 5,000 to Rs. 1,000 and added ICRA’s credit rating per Shiv’s comment below. 

114 thoughts on “Indian Railways Tax Free Bond Details”

  1. Dear Shiv,

    I may have to close my demat account in which I had purchased IRFC Bonds. If I transfer the bonds to another demat account which is also on my name, will I continue to get 8.3% interest ?

    1. Hi TCB.. Though I think you should keep getting 8.30% in this case as it is not a sale of securities, it is just a transfer and you remain the first allottee but still I’m not 100% sure.

    1. Hi Mr. Ravi

      Not yet but it should be somewhere between 8.1% to 8.3% for the 15 years option. It is just to make them invest in the issue, otherwise interest rates have come down and ideally they should not offer such high rates.

  2. Hi

    IRFC Bonds list at a very marginal premium at Rs. 1011 and trading at Rs. 1010 as I write, touching a high of Rs. 1012 & a low of Rs. 1003. Going this way, I think the HUDCO bonds are going to list at a discount to the issue price by quite a margin, say Rs. 20-30.

    1. Worst of HUDCO listing fears has come true. These bonds have got listed today at Rs. 979, touched a high of Rs. 979.90, a low of Rs. 949.10 and currently trading at Rs. 954. It has been quite a bad listing and lowers investors’ confidence in these tax-free bonds quite a lot.

  3. Hi TCB

    I think it is primarily because of the fact that Retail Investors mostly apply for 15 year bonds with higher interest rates and start selling them as soon as they list and keep on doing it till the supply becomes normal.

    Also, It is a globally observed that 10 year bonds remain in high demand and most of the institutional investors & big investors invest in 10 year bonds. That is the reason they apply in 10 year bonds as compared to 15 year bonds. They dont apply in these bonds just for listing gains but hold on to them for a long time period.

    It also depends on the yield curve. You can check the yield curve from the below pasted link:

    http://www.ccilindia.com/OMHome.aspx

    Observing the Indian Yield Curve, 15 year bonds ideally should trade at a premium, but I think due to the supply exceeding the demand here, the 15 year bonds are trading at a discount to the 10 year bonds.

    1. Hi Vicky.. One should go for NHAI bonds as compared to IRFC because any one buying IRFC from the secondary markets is going to get 8.10% interest as compared to 8.30% in the NHAI’s case.

  4. Dear Shiv,

    Can you please explain why 10 year tax-free bonds of IRFC and NHAI are trading at higher prices than 15 year bonds eventhough the coupan rate of 10 year bonds is lower than 15 year bonds ?
    Thanks

  5. Dear Shiv,
    What is the latest about retails subscription ? When is closure expected ? Can I still apply to get full allotment ? Thanks

  6. When are NHAI bonds suppose to be listed?? NHAI bonds are traded at premium in last 2 days before listing…. When is IRFC issue close expcted???

  7. i am interested to invest in railway financial corporation limited infrastructurebond .
    pl.send me the details

    bo

    1. Hi Mr. Indranil

      Here is the web link to download IRFC Tax Free Bond application forms online:

      http://sbicapsecu.co.in/pdfstamping/PDFBondMaster.aspx?SubBrokerName=ShivKumarKukreja

      Just fill this form, attach the investment cheque along with the self-attested copies of PAN card, address proof and a cancelled cheque and deposit all thes at the nearest collection centre in your city.

      In case you have any query regarding IRFC Tax-Free Bonds or want to invest in these Tax-Free Bonds, Call/SMS 9811797407 (Gurgaon, Delhi or Noida) or mail us at ojascap@gmail.com

  8. Hi Mr. Mukesh

    Please check this link, you can check almost all the listed NCDs here from the ‘NCD’ list.

    http://www.edelweiss.in/Debt/DebtSnapshot.aspx?cn=SBIN-N5

    Infrastructure Bonds like IDFC, L&T, REC, IFCI etc. have a lock-in period of 5 years so you cannot trade in them before that period ends, even though they are listed at present. Other NCDs, which dont give tax exemption and dont have a lock-in period, are tradable on the debt segment of NSE/BSE.

  9. How to trade in these bonds.. IDFC, etc. I read that these will get listed in Debt Segment of NSE. I do have online access though SBICap Sec for shares trading but not sure where to find for these bonds of Debt segment.

    Appreciate help. Thanks.
    Mukesh

  10. I dont think so because I think there will be a lesser interest from QIBs, or for that matter any other buyer, in IRFC Bonds than NHAI Bonds because of the condition of a lower rate of interest to the subsequent allottee, if sold in the secondary markets. Even if both these issues give similar returns, why should I pay brokerage by selling NHAI Bonds, why should I pay STCG on the realised profits. If I’m that excited & confident about IRFC issue then I’ll apply for it separately to my full capacity rather than booking profits in NHAI & then investing those proceeds in IRFC.

    Yes if somebody is short of funds to invest in IRFC then probably he/she should adopt your strategy. I think NHAI Bonds will always trade at a premium to IRFC Bonds unless NHAI’s financial position becomes relatively weaker or due to some event based issues. Rest I cannot look into the future.. 😉

  11. Dear Shiv,
    Don’t you think it is better to sell NHAI on listing and invest the same funds in IRFC which is also going to give 8.3% and will also appreciate in market price almost to the same extent as NHAI ?

  12. Very interesting to see how people are following up on Tax Free bonds. The 2 issues of NHAI and PFC are in the process of allotment. IRFC and HUDCO hit the market. Those who want more investment will defoinitely go for IRFC. The NHAI will get listed next week. There cann not be high premium considering that other bonds are already in market at par. The attraction of these bonds are Interest is not taxable and helps those who pay 20-20% tax bracket. Surely the honest tax payers. One should consider this as long term investment and not look at the premium. It is better for them to concentrate on equities.

  13. Hi Sreedhar.. Probably you are quite right. But, at the same time, marketing by brokers & news publications have also played a big role here as you can vary well observe yourself the difference of investor interest at that time and now.

    1. Dear Sreedhar and Shiv,
      Probably you have been able to explain the reasons for low subscription to PFC bonds. But still, there is no explanation for zero trades post listing especially when QIBs / HNIs are heavily subscribing to every new bond issue. I hope you can find some reason for this and enlighten us. Thanks

      1. Even QIBs were not that excited about these issues probably because they were anticipating NHAI or other issues coming with a higher rate of interest. Moreover, QIBs also want to invest in an issue where there is enough volumes to cashout whenever required. This was not the case with earlier issues. If any QIB, which invested in PFC issue at that time, wants to cash out now, it wont get any buyer because that prospective buyer would not buy it due to the fear of getting stuck in this investment for an unknown period till it gets another buyer. There were other reasons also like Inflation not falling, RBI’s hawkish tone, IIP in +ve zone, Reports of Govt. hiking petrol prices again, etc. etc.

  14. Hi Shiv

    The main reason for the disinterest in PFC 8.16 % Issue was the yield of GSecs at that point of time & also the general mood was pessimistic due to sharp deterioration in the rupee .In Nov the bond yield 2021 ,8.79 touched 9.So when Gsecs were yielding 9 % ,who will care to look at 8.16.When NHAI subscription was on,The same Gsec yield was 8.54 & more importantly the outlook was for a bond rally which happened post the subscription.Since next year budget may disallow any company to raise money by Issuing tax free bonds & also a final opportunity to Lock in a very good interest rate ,investors flocked to NHAI bonds.I myself was aware of both Issues but went only after NHAI after satisfying myself that Interest rate are surely south bound.

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