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
‘AAA’ rated REC issue offered 8.71% to its investors, ‘AA+’ rated HUDCO issue fixed it at 8.76% and then ‘AAA’ rated IIFCL issue managed to cross REC’s peak rate of interest with 8.75%, but now it is the turn of Power Finance Corporation (PFC) to surpass all previous rates to set this year’s highest interest rate on its tax-free bonds by offering 8.92% for a 20-year duration.
PFC would be the fourth company to launch its public issue of tax free bonds this year from Monday i.e. October 14th. The issue would run till fifth Monday i.e. November 11th. But, the company may extend it or preclose it, depending on the investors’ response to the issue.
Interest rates offered by PFC are the highest rates for all three tenors. PFC has set its coupon rates at 8.92% per annum for 20 years, 8.79% per annum for 15 years and 8.43% per annum for 10 years. This jump is due to a rise in the benchmark G-Sec rates in the last 10-15 trading days, after the Repo Rate hike by the RBI.
Size of the Issue – PFC has been authorised to raise Rs. 5,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 1,124.10 crore through a private placement on August 30th. The company plans to raise the remaining 3,875.90 crore from this issue, with the base issue size of Rs. 750 crore and the green-shoe option of Rs. 3,125.90 crore.
Like REC, if this issue gets subscribed to the tune of Rs. 3,875.90 crore, it will be the last issue of PFC this financial year.
Green Signal for NRIs – After IIFCL not allowing NRIs and QFIs to invest in its issue, PFC has decided not to do that. NRIs, on repatriation basis and on non-repatriation basis, are eligible to invest in this issue. Qualified Foreign Investors (QFIs) are also eligible to participate in this issue.
No Lock-in Period – Many people have been asking me about the lock-in period of these tax-free bond issues, but I don’t know how I missed to mention it here in all my previous posts that there is no lock-in period with these tax-free bonds. If you subscribe to these bonds in demat form, you can sell them anytime you want after their listing on the stock exchange.
These are not tax saving bonds, like 80CCF Infrastructure Bonds or 54EC Capital Gain Tax Saving Bonds, which carry a lock-in period of five years and three years respectively.
Listing – PFC will get these bonds listed only on the Bombay Stock Exchange (BSE). Investors can apply for these bonds either in demat form or in physical form, as per their choice. The company will get the bonds allotted and listed within 12 working days from the issue closing date.
Rating of the issue – Three credit rating agencies, CRISIL, ICRA and CARE have rated this issue and all of them have rated it as ‘AAA’, which is their highest rating to any debt issue. Also, these bonds are ‘Secured’ in nature against certain assets of the company.
Categories of Investors & Allocation Ratio – The investors again have been classified in the following four categories and each category has certain percentage of the issue reserved for the allotment:
- Category I – Qualified Institutional Bidders – 15% of the issue is reserved
- Category II – Non-Institutional Investors – 20% of the issue is reserved
- Category III – High Networth Individuals including HUFs, NRIs & QFIs – 25% of the issue reserved
- Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue reserved
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 on Application Money & Refund – PFC will pay interest to the successful allottees on their application money at the applicable coupon rates, 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.
Factors favouring investment in this PFC Issue…
* Highest Coupon Rates – Thanks to a sudden spike in the G-Sec yields in the last 10-12 trading days since the RBI raised the Repo Rate in its monetary policy of September 20th, PFC has been to offer the highest interest rates of the current financial year. I think with 8.92% or 8.79% tax-free rates, investors in the 30% or 20% tax brackets would not even think of going for a bank FD @ 9%.
* RBI cutting the MSF Rate – RBI has cut the MSF Rate by 50 basis points to 9% a couple of days back. The idea was to reduce liquidity crunch in the banking system and help banks in reducing their cost of overnight (very short-term) borrowings and also normalize the yield curve. This move makes market participants believe that the RBI will try to cap the rise in overall interest rates as much as possible.
* Fall in G-Sec Yield – As a result of the RBI’s move to cut the MSF Rate, the 10-year G-Sec yield has fallen from 8.68% to 8.46% in the last couple of days. If this fall is not temporary and continues for a little longer time, you would see a fall in the coupon rates of the upcoming tax-free bond issues.
* Postponement of QE3 Tapering & US Shutdown – US Federal Reserve’s decision to postpone QE3 tapering and a partial shutdown in the US have resulted in a fall in the 10-year bond yield there from 3%+ to 2.64% today. This should also keep the sentiment somewhat healthy here in the Indian bond market.
* Steep fall in September Trade Deficit – With a fall in gold & oil imports and a surge in exports, the Ministry of Commerce today announced a steep fall in our September trade deficit. The problem, which was becoming too burdensome for our economy, is finally getting controlled. This should strengthen the value of Indian rupee against the US dollar in the coming days and the bond yield should also move lower.
Factors against this PFC Issue – Though there are not many factors which come to my mind against this issue, but overall things are not very bright for the power financing sector here in India. PFC, REC and PTC India Financial Services are some of the companies which have been struggling to get their money back which they have been lending to the state electricity boards (SEBs) over the years.
These kind of events have resulted in its share price falling from Rs. 350+ during 2010-11 to below Rs. 100 this year and I think stock price performance is a good barometer to check a company’s current financial health and future prospects. So, this is one thing which you should consider before investing your money in this issue.
With PFC offering relatively higher interest rates and NHPC issue hitting the market only in the third week, I would prefer to invest my money in this issue as compared to HUDCO and IIFCL issues. With so many positives and a possible fall in inflation & interest rates, I think PFC’s rates would be the highest coupon rates offered by any ‘AAA’ rated issuer this financial year.
Application Form of PFC Tax Free Bonds
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 PFC tax-free bonds, you can contact me at +919811797407
Dear Shiv,
I have to invest (suppose=100000 Rs) in Public Finance Corporation (PFC) Bonds. If I purchase from a retail investor would I be a retail investor or not and whether I would get high percentage of interest as retail investors get ??
Dear Shrenik,
Yes, you’ll be treated as a retail investor and still get a higher rate of interest.
pls send me link for ntpc & hudco bonds.
Here you have the links Aryan:
http://www.onemint.com/2013/12/01/hudco-9-01-tax-free-bonds-tranche-ii-december-2013-issue/
http://www.onemint.com/2013/12/02/ntpc-8-91-tax-free-bonds-december-2013-issue/
NTPC issue stands closed today.
Use below link which gives 10 yr and long term yield.
10 yr yield is different than Bloomberg yield.
http://www.investing.com/rates-bonds/india-government-bonds?maturity_from=180&maturity_to=290
Thanks Amit for the link !!
Your link carries all the benchmark yields, but the Bloomberg link is practically more relevant.
Prospectus up on NTPC site. 8.66%, 8.73% and 8.91% for 10, 15 and 20 yrs for retail investors.
For Hudco 8.76%,8.83% and 9.01% as it is AA+ compared to AAA rated NTPC
Are these both issues getting launched on same day for eg: 3rd December?
Hi Ikjot,
As you must have got updated by now, HUDCO is getting launched on December 2nd and NTPC on December 3rd.
Thanks for updating the coupon rates Shashwat !!
Drastic fall in yield today. Prospectus has to filed this week as last two weeks average yield was 9%+. Any updates?
7.16% G-Sec yield is still trading at 9.04%. It is the new 8.83% G-Sec which has a yield of 8.74% and that is why the Bloomberg chart is showing a steep decline in 10-year Indian G-Sec.
At least two final prospectus would get filed this week. I hope we get higher coupon rates with these issues. NTPC issue is getting launched on 3rd December. HUDCO also I think.
IRFC bonds to come in December. http://www.deccanherald.com/content/370457/railways-tax-free-bonds-likely.html
Yes, IRFC issue is expected in the first week of December.
how much commission do u give to the retail cutomer if one submits an application for a bond issue through you?
Nothing Sandy. We deserve what we earn for our services/efforts. Also, as per SEBI, it is illegal to share your incentives.
hi shiv
I have applied for PFC on day 2 itself in retail category. very initial days of opening. but today I received back my amount. I applied online via Fundsindia.
what could be the reason shiv ?
Hi Vignesh,
Though it is very strange that it has happened, I think this is due to some mistake/error by FundsIndia in submitting/bidding your application. You should write a mail to Karvy Computershare asking the reason for your application getting rejected.
Hi Shiv,
Any news on the opening dates for IIFCL , IRFC and NTPC bond issues ? 10-year bond yields have crossed 9% , so expecting a good coupon rate for these issues.
Hi Aditya, no news on the opening date of any of the issues as yet.
RBI is bringing new benchmark Bond, how it would affect yields and upcoming bond’s coupon rate?
Hi Shashwat, I’m not sure how it would affect bond yields and the coupon rates of upcoming tax-free bond issues. Don’t want to make wild guesses either.
curently they are tagged to benchmark average for last 2 weeks so after the new benchmark will bonds be tagged to new one?
Yes, it will be like that only.
Hi Shashwat,
Please check this link – http://www.business-standard.com/article/finance/bond-spread-set-to-widen-with-new-10-year-benchmark-113112300133_1.html
It is a nice read to understand what’s happening in the bond market with 10-year benchmark govt bond.
Below link still shows yield 9.10%.
http://www.bloomberg.com/quote/GIND10YR:IND
The new 10 year benchmark yield is 8.78% and expected to fall as per this article. So no hope of 9%+ bonds now from IRFC and IIFCL ?
OR
till the time old g-sec remains benchmark we can expect higher rates on upcoming TFBs
PLEASE ANSWER THE QUESTION
Yes Shashwat, till the time 7.16% G-Sec is there, it’ll remain the benchmark and the 10-year coupon rate will be linked to it.
PFC bonds got listed today on the BSE. 8.92% 20-year bonds hit a high of Rs. 1,008, a low of Rs. 1,001.01 and closed at Rs. 1,006.50 with total 22,172 bonds traded during the day.
What is the Record Date? It is not mentioned in the circular
Record Date is there in the prospectus – It is 15 days prior to the Interest Payment Date.
Can you confirm if it is 1st or 2nd November?
Sorry Vivek, I am not sure whether it would be November 1st or November 2nd or October 31st every year. It is decided every year by the board of the company and then a filing is made with the exchange. Here is an example:
http://nseindia.com/corporates/corpInfo/equities/AnnouncementDetail.jsp?symbol=NHAI&desc=Record+Date&tstamp=300820131249&
PFC tax-free bonds to get listed on the BSE on November 20th i.e. Wednesday.
Here are the BSE codes for the same:
8.43% 10-year bonds – BSE Code – 961802
8.79% 15-year bonds – BSE Code – 961803
8.92% 20-year bonds – BSE Code – 961804
Deemed date of allotment has been fixed as November 16, 2013. Interest will be paid on November 16th every year.
Source: http://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20131119-17
I sold half of my IIFCL Bonds at 1015 on icicdirect. after 1% brokerage i will get 1000 only. But I think better rates will come in coming months. Will sell rest tomorrow. Anyone with good reason not to exit.
ICICI Direct’s 1% brokerage is too much for NCDs. If I were at your place, I would have got one more demat account opened.
I think it is a good idea to sell at least half of your holdings.
Hi Shiv!
Could you give the link to check the allotment status, BSE code for these bonds, the deemed date of allotment & the record date?
Hi Simple,
At present, these links are not uploaded. I’ll share them once I’ve have them.
I also got confirmation today. Thanks for the update.
You are welcome Mukesh!
Hi Shiv
Do you know when next tax free bond issue will hit the market? I see IRFC has already filed prospectus with SEBI. NTPC and NHB are in the news. Any confirmed dates when next tax free bonds will be issued? What is your guess on interest rates for future TFB. Thanks a lot for your response in advance
Regards
Ramadas
Hi Ramadas,
IIFCL, IRFC, NTPC & NHB are lined up to be issue these tax-free bonds, but dates are yet to be announced. I think at least a couple of them should hit the market in the last week of November. Not 100% sure, but I think coupon rate should cross 9% this time for the 20 year option.
Thanks Shiv for confirmation.
I applied for 2 set of Pfc bonds one early and one very late. I recieved confirmation for 1st set , however for the second one looks like I didn’t get d allotment
You must have applied for it on November 5th Prash for you not to get any allotment in the 2nd set.
I’ve got the PFC tax-free bonds credited to my demat account today. I think the bonds will get listed on the BSE on Wednesday.
I don’t know how exactly it works, but I felt by reading your article that it is worth an investment. So I applied for it via my axisdirect account. However, I don’t see any updates on it though you say that it is closed now. Does it take some time for the results to come out? Money has been deducted from my linked account, but it is not showing in my axisdirect account that it has been allocated to me. Nor has money come back to my account in case it has not been allotted.
Please clarify.
Hi Mukesh,
It takes up to 12 working days for these companies to allot these bonds & get them listed. You can expect PFC to allot you the bonds & pay the interest due on your application money within next 2 working days.
Thanks for the clarification, Shiv.
When I contacted AxisDirect with same query, they simply asked me to contact Karvy. When I said them I don’t know who to contact and what to ask, and it is their duty to update me, they just repeated themselves asking me to contact Karvy.
As compared to them, your reply was informative and to the point. Appreciate it.
Thanks Mr. Mukesh! Most of the companies dealing in financial products here in India are sales-oriented. Their after-sales service levels are very poor. There are many factors behind it, some are genuine & acceptable, but some are really unacceptable. That is the way we get things here.