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
Rural Electrification Corporation (REC) will be launching the first public issue of tax-free bonds for the current financial year from 30th of this month. The company is offering quite attractive interest rates to the retail individual investors with 8.26% for 10 years, 8.71% for 15 years and 8.62% for 20 years. These rates are higher by approximately 0.70% to 1.50% as compared to the rates offered last year.
REC plans to raise Rs. 3,500 crore from this issue, including the green-shoe option of Rs. 2,500 crore. Though the official closing date of the issue is September 23rd, I think the issue should get closed before that due to oversubscription.
The government has allowed REC to issue Rs. 5,000 crore worth of tax-free bonds this financial year and the CBDT notification has mandated a minimum of 70% of this amount to be raised from public issues. As the issue size is Rs. 3,500 crore, if it gets fully subscribed this time itself, I think REC would raise rest of the money through private placements only and it will become the last issue of REC this financial year.
NRIs, QFIs & “Retail Individual Investor” – Non-Resident Indians (NRIs) on repatriable as well as non repatriable basis and Qualified Foreign Investors (QFIs) are also eligible to invest in this issue. The scope of a retail individual investor, investing upto and including Rs. 10 lakhs, has got broadened with the introduction of NRIs and QFIs (as individuals). It includes Hindu Undivided Families (HUFs) also through the Karta.
So, the investors have been classified into the following four categories:-
I – Qualified Institutional Bidders (QIBs) – 20% of the issue reserved
II – Non-Institutional Investors (NIIs) – 20% of the issue reserved
III – High Net Worth Individuals including HUFs, NRIs & QFIs – 20% of the issue reserved
IV – Retail Individual Investors including HUFs, NRIs & QFIs – 40% of the issue reserved
Interest Payment Date & Record Date – As this question gets asked by many of the investors throughout the year, it is better to mention it here itself as the date is known in advance this time. Interest will be paid on December 1st every year and the record date will be 15 days prior to that.
No Cumulative Option – There is no option of taking cumulative interest at the time of maturity with these bonds. Interest will be paid annually.
Safety, Ratings & Nature of Bonds – Being a ‘Navratna’ PSU, REC offers a high degree of safety as far as your investment is concerned and that gets reflected in the ratings assigned to this issue. The issue has been rated ‘AAA’ by four rating agencies, CRISIL, CARE, India Ratings and ICRA. It is the highest rating given by each of these companies. Also, these bonds are secured in nature against certain assets of the company.
Listing – REC bonds will get listed on the Bombay Stock Exchange (BSE) within 12 working days from the closing date of the issue. Investors have the option to apply these bonds as per their choice, either in physical form or in demat form.
TDS & Minimum Investment – As these are tax-free bonds, there is no question of TDS getting deducted, whether you take them in physical form or demat form. Minimum investment required is Rs. 5,000 only i.e. 5 bonds of Rs. 1,000 face value each.
Interest on Application Money & Refund – REC will pay interest to the successful allottees at the applicable coupon rate and at 5% per annum to the unsuccessful allottees.
Tax Treatment on Sale – Listed bonds held for more than 12 months qualify as long term capital assets and if sold thereafter, would attract a flat 10% capital gain tax, without indexation benefit. However, if the bonds are sold prior to holding them for more than 12 months, then short-term capital gain tax would be applicable, as per the tax slab of the investor.
Key Attractions of these Bonds: There were many issues with the tax-free bonds issued last year. There was a huge difference between the interest rate paid to the retail investors and the interest rate paid to other investors. Also, the subsequent buyer from the secondary markets was to get a lower rate of interest. Moreover, the cut from the G-Sec rate was also set on a higher side.
I think most of those issues have got rectified this year. Here are some of the key attractions of these bonds this year:
High Interest Rates – Due to the falling rupee and the unsuccessful measures taken by the Government and the RBI to control it from further fall, the yields of the benchmark government securities (G-Secs), against which the coupon rates of these tax-free bonds get fixed, have risen sharply in the last 45 days or so. 10-year benchmark yield touched a high of 9.47% before falling sharply to 8.25%. Thanks to this jump, the company has been able to offer such attractive coupon rates, especially for the 15 years period.
A word of caution. 10-year benchmark yield has again jumped back to close at 8.78% on August 27th. If the economic fundamentals of the country continue to deteriorate at the same speed as they have been doing, the yields could keep moving higher and the rupee could keep falling further against the dollar. But, I still hope India would come out of the current crisis soon and as the macroeconomic things get stabilised, these rates would look highly attractive again.
High Interest Rates, even if bought from the Secondary Markets – As per the CBDT notification – “The higher rate of interest, applicable to RIIs, shall not be available in case the bonds are transferred by RIIs to non retail investors”. So, the interest rates earned by the retail individual investors this year would remain higher even if they buy these bonds from the secondary markets subsequent to the offer period.
Your eligibility for a higher rate will depend on the number of bonds held in your name on the record date and the same will get tracked by your PAN number. Your holding should not be more than 1000 bonds per issue on the record date to get higher rate of interest.
Till last year, only the first allottees were eligible for a higher rate of interest and the subsequent buyers from the secondary markets were supposed to get a lower rate of interest. This factor will encourage the retail investors to participate in the secondary markets and thereby result in higher liquidity.
Low Differential – The differential between the rates offered to the retail individual investors and the other categories of investors has been cut down to 25 basis points (or 0.25%) only, as compared to last year’s 50 basis points (or 0.50%). This is the best step that has been taken this year. This factor would attract higher participation from the other categories of investors, both during the initial offer period as well as in the secondary markets.
I honestly think that these tax-free interest rates are very attractive. If I compare these rates with the interest rates on bank fixed deposits, the rates look quite similar, but with huge difference of tax applicability. I seriously hope India’s macroeconomic picture should start looking better in the days to come, only then we will be able to enjoy these high rates, otherwise inflation would again eat up all fruits of our hard work.
Link to Download the Application Forms of REC Tax-Free Bonds
If you need any further info or you want to invest in these bonds in Delhi/NCR, you can contact me at +919811797407
Hi,
The interest credited seems to be erroneous. I was expecting 8.71% interest for the 1000 bonds (Rs. 87100/-) However there is credit of Rs. 612/- only.
Anyone else facing similar issue?
I have written to rectfbond@recl.nic.in and
mv.kameswararao@karvy.com
Hopefully should get a reply soon.
– Hemant
Hi Hemant,
I hope you get a reply soon.
Yes. I got immediate response and the amount was deposited too.
That’s great !!
Dear Shiv,
I had purchased 500 REC Tax free Bond, Series 2bonds, category III, (INE020B07GH7), as retail investor, interest 8.32 when it was offered in March 2012.
I subsequently bought 15 bonds from open market in April 2012, interest 8.12. Though these two transactions were at separate times I am being treated as HNI and received less interest and following message from REC. I am loosing Rs.1000/per year. Shall I sell the 15 bonds purcshased form the open market. Reqeust, advice.
As per the terms of prospectus if the investor is holding more than 500 bonds than interest as applicable for Retail Bonds will not be paid to him, those investors will fall under the category of High Networth Individuals.
Accordingly as you are holding total 515 bonds interest has been paid to you as applicable for HNIs i.e @ 8.12%.
Best regards
Dear Anand,
Yes, you need to sell these additional 15 bonds to qualify for a higher rate of interest.
Thank you very much Dear Shiv
Regards
You are welcome Anand !!
Any new tax free bonds coming now?
Or in pipeline for 2014-2015 ?
Also advise if any good buy option from secondary market
for a lomger term of 20 years tax free bonds at present .
Thanks.
The union budget for FY-2014-15 as not provided for tax free bonds in the current year. Regarding choice of ‘good option’ from secondary market, answer lies with the price on a given day, your time horizon etc. Please consider the interest payment date. Otherwise, generally speaking there is not much difference between various bonds – all issuers are PSUs. You can consider credit rating of various issuers if it is important for you.
Today I see a drop of almost 6-7% , prices falling by almost 80.
Any specific reason ? Just because of approaching interest payment date ?
These bonds have got “ex-interest” today, that is the reason behind their price fall.
Hi Shiv
Great post. I am only a beginner who is trying to figure out investment options in Bonds (REC’s, etc). Just wanted to know the basics. If I am buying 100 bonds (5000 x 100 = Rs.5 lacs) Then the coupon rate that we call is that like interest rate (6% annually?)
If so, then after that is there a final principal amount which we return or does principal amount too comes up with some interested accumulated.
Hope my question was clear (without confusing you)
Looking forward to your answer. Thanks 🙂
Thanks Manpreet,
With REC 8.71% bond, the investor will get 8.71% as the interest. 8.71% is also called its coupon. So, the annual interest payment will be Rs. 43,550. On maturity, you’ll get Rs. 5 lakh back without any premium or discount.
Any news about Tax Free Bonds being offered in FY 2014-15?
No tax free bonds will be issued this financial year and probably going forward also.
Its going to be one full year in next couple of days since this series of REC bonds were allocated. Post 1 yr the gains will be taxed at flat 10%. May be there could be some selling and profit booking. There may be a chance to buy these at a lower price. Given the rally in GSEC yields within past couple of weeks, it would not be a bad idea to add some more.
Quite possible.
Why does a Bond with face value Rs. 1000/- trade at Rs. 1135-1154? If one buys for Rs. 1135-1154, the effective interest will be very low compared to
original interest rate i.e. 8.46% or 8.71% for 15 year Bonds?
Yes, that is correct. What you are calling as effective interest is termed as yield to maturity (YTM) and it is currently moving between 7.40% to 7.65%. So, if you buy these bonds at the current market price and hold them till their maturity, you will earn 7.40% to 7.65% annualized return.
These bonds are trading at a higher price due to a high demand in the market. Investors are willing to pay such high prices in order to earn tax-free interest.
I think the most TFBs, issued in the last financial year are cum-interest for FY 2014-15 and so the actual YTM may be even higher, if the receivable interest for the current financial year is adjusted in the purchase price. Still the actual YTM depends upon the actual interest payment date in the current financial year for each such TFBs.
YTM considers the accrued interest as well, so it should not be higher than the calculated ones, given the listed YTMs are calculated in the correct manner.
I had invested in REC series 2 ( 15 yrs ) – for coupon of 8.46. While checking the rates today, I am surprised to see the CPM as 1320 !!!! Is this some sort of a mistake ? 32% returns in debt 🙂
http://www.bseindia.com/NewStockReach/StockReach_Debt.aspx?scripcode=961776
Hi Sagar,
Only a single trade of 50 bonds got executed yesterday at Rs. 1,320 and this price is somewhat misleading. Its fair price should be between Rs. 1,135 to Rs. 1,155 in normal trading.
Though 32% return is unusual with debt instruments, there are tax-free bonds which have given 20%+ returns in just 8-9 months time, like NTPC, NHB etc.
http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=NTPC&series=N6
http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=NHBTF2014&series=N6
Just came to know that REC bonds are redeemable. Can you please clarify about when the PSU can redeem bonds and is there any “call protection” ?
Also, can you list out out of tax free bond issuances so far, which are redeemable and which are not?
Is there any reinvestment risk with such tax free bonds?
Hi Sanjay,
None of these bonds are redeemable before maturity and there is no “Call Option” with any of these companies or “Put Option” with their investors.
Reinvestment risk is there with the interest you get annually and it is higher for 10 year bonds as compared to 15 year bonds or 20 year bonds.
NHPC tax-free bond issue opens on October 18th. Coupon Rates are as under:
8.92% for 20 Years
8.79% for 15 Years
8.43% for 10 Years
The rates offered are absolutely same as the PFC rates. It is also rated ‘AAA’. The issue closes on the same date i.e. November 11th.
PFC Tax-Free Bonds Issue opens on October 14th. Coupon Rates are as under:
8.92% for 20 Years
8.79% for 15 Years
8.43% for 10 Years
Hi Shiv,
What is the date of year when we will be getting annual interest on REC Bonds?
Hi Akhilesh,
It is December 1st every year.
IIFCL tax-free bonds issue opens October 3rd. Tentative coupon rates are 8.26% p.a. for 10 years, 8.63% p.a. for 15 years and 8.75% p.a. for 20 years. The issue is rated ‘AAA’ as compared to ‘AA+’ for the HUDCO issue & ‘AAA’ for the REC issue.
REC tax-free bonds got listed today on the stock exchanges and trading at a marginal premium to its face value of Rs. 1,000. It touched a high of Rs. 1,009 and a low of Rs. 1,000.
http://www.bseindia.com/stock-share-price/rural-electrification-corporation-limited/871rec28/961779/
Link to check the allotment status of REC Tax-Free Bonds:
http://mis.karvycomputershare.com/ipo/
REC tax-free bonds to get listed on the stock exchanges on September 30th i.e. Monday.
Here are the BSE codes for the same:
8.26% 10-year bonds – BSE Code – 961778
8.71% 15-year bonds – BSE Code – 961779
8.62% 20-year bonds – BSE Code – 961780
Thanks for the update !
Quick question, I don’t yet see the bonds alloted in my ICICI direct account. Can I expect that to happen by today or Mon ?
Also, I believe REC will payout the interest on application money to successful allotees as well. Would this be paid out in next few days ?
Hi Sagar,
Bond allotment process for the bonds allotted in the demat form gets completed before the listing happens on the stock exchanges. So, you can expect the bonds to get allotted either by today evening or maximum by tomorrow morning.
I am not sure, but I think they have already started paying the interest money. They have paid interest till September 23rd only, as the Date of Allotment is September 24, 2013. You should check your bank account.
Hi Shiv,
Aren’t these REC bonds going to be listed on NSE too? I ask this since, NSE’s website continues to show REC-N1 to N4 only.
Request you to confirm.
Thanks,
Mayank
Hi Mayank,
I think I’ve committed a mistake here. These bonds are not getting listed on the NSE. I don’t know from where I got this info about its NSE listing, I think it must be some product note. I apologize for the error, I’ll rectify it right now.
Hi Shiv,
Thanks for the clarification. I’m sure it’s quite confusing with the recent deluge of debentures & bonds. Appreciate your efforts in writing timely post on the various debentures being offered.
Thanks,
Mayank
Thanks Mayank!
Actually, I must have seen or heard about it somewhere while writing that post, otherwise it has never happened like this.
Also, issues which do not get listed on the NSE, do not show bidding details on the NSE website. But, REC issue bidding details were also getting updated there, so that also created some confusion.
I got a credit from REC 2013 bond saying refund credited to my bank account. Does that mean the bond isn’t alloted ? I did apply before closing date on category IV. Eventhough it was over subscribed at that time, I assumed based on your comment, it might have been allotted. (since category I was less subscribed). Or is it related to something else? I will be disappointed if I didn’t get the allotment. Please let me know. Thanks,
That is strange. Amount has been debited from account for the bonds. how did you apply – physical forms /online trading site ?
sorry typo in my above post
I meant “Amount has been debited from my account for the bonds.”
Hi Pradeep,
I think you applied through ASBA for the REC bonds and now you will get bonds allotted equivalent to the money debited from your account.
Sir,
The bonds have been credited to my demat account. Congrats to all allotees. 🙂
Great!
Hi Sundar,
It must be the interest on your application money. Please check the exact amount of credit. I think the retail investors should get 100% allotment, even if applied for it on the last day.
Fed surprises everyone by the decision to delay tapering !
G-Sec yields already around 8.18 as of now. So I think this bond should see some nice listing gains.
Are 10 to 15% gains feasible here on listing ?
For a little longer horizon of about 6 months, 15% should be easily feasible right ? Taking into account first tax free payout (8.4%) + Apprx. 10% capital gain – short term taxes ?
Also falling g-sec rate would indicate that one should not miss on HUDCO opportunity right ?
Hi Sagar,
1. 10-15% gains not possible on listing, unless 10-year G-Sec yields fall below 7.50%.
2. Not easily feasible to earn 15% in 6 months, but not impossible. For this to happen, Indian rupee is required to reach 55 against the dollar, 10-year G-Sec yields to fall below 7.50%. REC will pay interest only for 2-3 months on December 1st.
3. Yes, it seems today that HUDCO opportunity should not be missed, but one should not remain in a hurry as it will take its own time to get subscribed.
Thanks Shiv.
Yes, I made a mistake about #2, I was assuming it will pay out complete interest on Dec-1.
Dear Sir,
When are these REC bonds (Offer closed on 1 September 2013) expected to be allocated?
Thanking you. Best regards, RAKESH
Hi Rakesh,
Correcting you first, this issue closed on September 16, 2013 and not September 1. I think yours is a typing error. Allotment of REC bonds is expected to happen before October 2nd and listing is expected to happen on October 3.