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
After a reasonably good response to the REC tax-free bonds, the next eligible company to come up with such an issue is Housing and Urban Development Corporation Limited (HUDCO). The company will be launching its issue from the coming Tuesday, September 17.
The rates the company is going to offer in this issue are higher than the rates offered by REC in its issue, which is still open and getting closed on September 16. There are two reasons for it, firstly, HUDCO issue is ‘AA+’ rated and that is why it can offer rates 10 basis points (or 0.10%) higher than any ‘AAA’ rated issuer. Secondly, the average G-Sec rates have been ranging higher in the past 10-20 days than they were earlier when REC came up with its issue.
As compared to REC’s 8.26% (10Y), 8.71% (15Y) and 8.62% (20Y), HUDCO is offering 8.39%, 8.76% and 8.74% rate of interest for the respective tenors.
Though the interest will be paid annually, I do not know the interest payment date as yet, as the final prospectus filed on September 11 is still not available on SEBI’s website, on BSE’s website, on HUDCO’s website and not even on any of the lead managers’ websites. It is quite disappointing for me not to have the prospectus available for public reference even three days prior to the issue opening date.
HUDCO is allowed to raise Rs. 5,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 190.80 crore through private placement. So, now it plans to raise the remaining Rs. 4,809.20 crore through this public issue, including the green-shoe option of Rs. 4,059.20 crore. The base issue size is Rs. 750 crore.
The official closing date of the issue is October 14 and the company may extend or preclose the issue, depending on the investors’ response to the issue.
There are many things which are common in this issue and the REC issue, so I will quickly state those features which are different in this issue.
Rating of the issue – CARE and India Ratings have assigned a rating of ‘AA+’ to this issue, which is also ‘Secured’ in nature. HUDCO is wholly-owned by the government of India, so the investors’ investment is quite safe.
Listing – HUDCO will get these bonds listed only on the Bombay Stock Exchange (BSE). The allotment and the listing will happen within 12 working days from the closing date of the issue. Investors can apply for these bonds either in physical form or in demat form, as per their comfort and requirement.
Interest on Application Money & Refund – The investors will get interest on their application money also, from the date of investment till the deemed date of allotment, at the same rate of interest as the applicable coupon rate is. Unlike REC issue which is to pay 5% p.a. interest on the refund money, HUDCO will pay the applicable coupon rate.
Categories of Investors & Basis of Allotment – The investors again have been classified in the following four categories and each category will have certain percentage of the issue reserved for the allotment:
Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved
Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved
Category III – High Net Worth Individuals including HUFs, NRIs & QFIs – 30% of the issue is reserved
Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue is reserved
QIBs portion had 20% of the issue reserved in the REC issue and after observing their response in that issue, their reserved portion has been reduced to 10% in this issue. Category III HNI investors will get this 10% share of the pie. NRIs are eligible to invest in this issue as well, on a repatriation basis as well as on non-repatriation basis. Qualified Foreign Investors (QFIs) are also eligible.
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 rates of this issue look very attractive to me. Earlier I used to say that the investors in the 30% or 20% tax bracket should consider these bonds, but now I advise investors even in the 10% tax bracket to go for these bonds. Though not strictly comparable, these bonds are attractive even against IIFL NCDs or Muthoot NCDs.
I think the way Indian rupee and the stock markets have recovered in the past 10 days or so, the G-Sec yields should also start falling soon. Going forward, I think the rates should not be higher than these HUDCO bonds, unless US Fed Reserve has something very dramatic in store for us in its meeting on September 17-18.
Link to Download the Application Form of HUDCO Tax-Free Bonds
If you need any further info or you want to invest in these bonds, you can contact me at +919811797407
Day 15 (October 8th) subscription figures:
Category I – Rs. 125.50 crore as against Rs. 480.92 crore reserved
Category II – Rs. 315.74 crore as against Rs. 961.84 crore reserved
Category III – Rs. 546.04 crore as against Rs. 1,442.76 crore reserved
Category IV – Rs. 1168.12 crore as against Rs. 1,923.68 crore reserved
Total Subscription – Rs. 2,155.40 crore as against total issue size of Rs. 4,809.20 crore
Day 14 (October 7th) subscription figures:
Category I – Rs. 125.50 crore as against Rs. 480.92 crore reserved
Category II – Rs. 279.24 crore as against Rs. 961.84 crore reserved
Category III – Rs. 535.12 crore as against Rs. 1,442.76 crore reserved
Category IV – Rs. 1133.73 crore as against Rs. 1,923.68 crore reserved
Total Subscription – Rs. 2,073.59 crore as against total issue size of Rs. 4,809.20 crore
RBI has today cut MSF Rate by 50 basis points (or 0.50%) to 9%, in order to cut liquidity crunch in the banking system. This is going to help banks in reducing their cost of overnight (very short-term) borrowings and also in normalization of the yield curve. Bond markets should cheer this news to some extent tomorrow.
Sir,
What is the status of PFC bond issue?
No info as yet.
Day 13 (October 4th) subscription figures:
Category I – Rs. 125.50 crore as against Rs. 480.92 crore reserved
Category II – Rs. 276.80 crore as against Rs. 961.84 crore reserved
Category III – Rs. 519.84 crore as against Rs. 1,442.76 crore reserved
Category IV – Rs. 1081.33 crore as against Rs. 1,923.68 crore reserved
Total Subscription – Rs. 2,003.46 crore as against total issue size of Rs. 4,809.20 crore
Day 12 (October 3rd) subscription figures:
Category I – Rs. 125.50 crore as against Rs. 480.92 crore reserved
Category II – Rs. 272.59 crore as against Rs. 961.84 crore reserved
Category III – Rs. 505.01 crore as against Rs. 1,442.76 crore reserved
Category IV – Rs. 1039.99 crore as against Rs. 1,923.68 crore reserved
Total Subscription – Rs. 1,943.09 crore as against total issue size of Rs. 4,809.20 crore
Hi Shiv
I have a A. O. P. status [ Association of Person – Family Trust – Taxed from the first rupee income ] for Income Tax purpose . So I would like to know if I would like to invest in this Family Trust – A O P for 20 Years in IIFCL T ax Free Bonds, which catagory applied to me
Retail Investor : 20 Years / 8.75 % OR Other Investor : 20 Years / 8.50 %.
By Income Tax view I am paying income Tax at the highest rate [ 30 % ] from my first One rupee earning.
Hi Paresh,
An Association of Persons (AOP) – Family Trust would fall in Category II of the eligible investors and would be eligible for 8.50% p.a. IIFCL 20 year option. I think it is better to do it by creating an HUF rather than AOP, if possible.
I would like to know what is the last date for IIFCL Tax Free Bond to apply.
Which one is good ? HUDCO or IIFCL ?
Hi Paresh,
IIFCL bonds issue will close on October 31st. Here is the link to check more details about it:
http://www.onemint.com/2013/10/01/iifcl-8-75-tax-free-bonds-october-2013-tranche-i-issue/
Rating wise IIFCL is better at ‘AAA’. Interest rate of IIFCL for the 20 year option is higher at 8.75%, but lower for the 10 year & 15 year option. Personally, I prefer subscribing for IIFCL 20 year bonds and taking it in the demat form.
Hi Shiv
Thanks for response
You are welcome Paresh!
Hudco bond subscription might slow down further as IIFCL is having better credit rating. Hudco bonds might list at a discount considering REC bond listing at par.
It has already slowed down, only retail investors & HNIs are investing due to higher rates for 10 year & 15 year options.
Day 11 (October 1st) subscription figures:
Category I – Rs. 125.50 crore as against Rs. 480.92 crore reserved
Category II – Rs. 270.30 crore as against Rs. 961.84 crore reserved
Category III – Rs. 494.97 crore as against Rs. 1,442.76 crore reserved
Category IV – Rs. 995.31 crore as against Rs. 1,923.68 crore reserved
Total Subscription – Rs. 1,886.08 crore as against total issue size of Rs. 4,809.20 crore
Seems to remain under-subsrcribed.
Yes, it looks like it would fall short of its total issue size. I think HUDCO should extend the closing date of the issue.
Day 10 (September 30th) subscription figures:
Category I – Rs. 125.50 crore as against Rs. 480.92 crore reserved
Category II – Rs. 268.11 crore as against Rs. 961.84 crore reserved
Category III – Rs. 474.86 crore as against Rs. 1,442.76 crore reserved
Category IV – Rs. 951.24 crore as against Rs. 1,923.68 crore reserved
Total Subscription – Rs. 1,819.70 crore as against total issue size of Rs. 4,809.20 crore
Shiv – What’s the commission that brokers share ,for say 5-10 lacs of investment, in such bonds issue? Last year I got .4 but this time I got .25. Is this ok?
Hi Anuj,
I can’t really comment on commission sharing by the brokers. As per SEBI guidelines, it is illegal to share incentives. It is really unfortunate that it happens. I think the commissions should be reasonable and never be shared.
When is the IIFCL tax free bond issue coming up?
IIFCL issue is getting launched from October 3rd.
I feel the differnece in interest rate is too little. Better to prefer IIFCL ?
Depends on the investor, the mode of investment – physical or demat, and ultimately the investment horizon. But, yes the 20-year option of IIFCL looks good to me.
I dont see info on the issue in IIFCL website.
http://www.iifcl.org/Content/Tax%20Free%20Bonds%202013%20Tr-III.aspx
Thanks sir. will PFC give more interest. when will the issue open ? 🙂
No info as yet.
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 HUDCO.
For 20 yrs the ROI is more for IIFCL 🙂
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. So far, 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/
Shiv – fundamental question – why is govt allowing interest on these psu bonds to be tax-free? Why this special perk for psu from IT dept? Are psu companies more valuable to economy than private companies?
This post, thanks to your patient responses, now offers great financial learning.
For current and future readers.
It is simple. The government wants to promote infrastructure development and support certain big PSUs, providing infrastructure financing.
I don’t know how much value addition these big PSUs do to the economy vis-a-vis private companies, but I think the intention is good, execution is very poor due to poor management of things and zero accountability.
Link to check the allotment status of REC Tax-Free Bonds:
http://mis.karvycomputershare.com/ipo/
Hi Shiv,
Do you think rising bad debt can be an issue for HUDCO in the future ? or Can this affect our investments/future annual payments in anyway ?
http://www.thehindubusinessline.com/industry-and-economy/banking/hudcos-net-npa-rises-to-5/article5171312.ece
Rising NPAs are never good for a finance company. So, there is no doubt that it is bad for HUDCO as well. Infrastructure sector has been bleeding here in India for quite some time now, especially road construction sector and power sector. If you read the article carefully, it is written that HUDCO’s problems are primarily due to a stress in the power sector.
All the companies, which have been allowed to raise money through tax-free bonds, belong to infrastructure or infrastructure finance sector and the NPAs have been rising for all these companies. If any of these companies defaults due to some major financial problems, then that can definitely affect our investments, future payments as well. So, that is one risk which must be considered before investing your money. But, I think the probability of a default happening is quite low in case of these government companies.
Thanks Shiv for your valuable input.
You are welcome!
Day 9 (September 27) subscription figures:
Category I – Rs. 125.50 crore as against Rs. 480.92 crore reserved
Category II – Rs. 262.97 crore as against Rs. 961.84 crore reserved
Category III – Rs. 456.85 crore as against Rs. 1,442.76 crore reserved
Category IV – Rs. 880.82 crore as against Rs. 1,923.68 crore reserved
Total Subscription – Rs. 1,726.14 crore as against total issue size of Rs. 4,809.20 crore