National Housing Bank (NHB), a wholly-owned subsidiary of the Reserve Bank of India (RBI) and the regulator of the housing finance companies (HFCs) in India, will be coming out with its issue of tax free bonds from the coming Monday, 30th of December.
The good news is that the company is going to offer 9.01% per annum for the 20-year option and 8.88% per annum for the 15-year option, which is the highest rate of interest any ‘AAA’ rated issue has carried till date.
Though the issue is scheduled to remain open for the whole of next month to close on January 31st, 2014, the company reserves the right to close it earlier as well in case the issue gets oversubscribed anytime before the due date.
Size of the Issue – NHB is authorised to issue tax free bonds worth Rs. 3,000 crore this financial year, out of which it has already raised Rs. 900 crore through a private placement carried out on August 30th, 2013. NHB plans to raise the remaining Rs. 2,100 crore from this issue, including the green-shoe option to retain oversubscription to the tune of Rs. 1,100 crore.
Rating of the Issue – Being the regulator of the housing finance companies and a wholly-owned subsidiary of the RBI, this issue of NHB has been rated as ‘AAA’ by three credit rating agencies, CRISIL, CARE and ICRA, which is the highest rating by these rating agencies.
Interest Rates on Offer – The company has decided to offer 9.01% p.a. with the 20-year bonds, 8.88% p.a. with the 15-year bonds and 8.51% p.a. with the 10-year bonds. HUDCO is currently offering 9.01% p.a. for 20 years, 8.83% p.a. for 15 years and 8.76% p.a. for 10 years, but that is a ‘AA+’ rated issue. At 9.01% and 8.88%, NHB issue has become the best AAA rated issue for the 20-year and 15-year duration respectively.
If you want to have only AAA rated bonds in your portfolio and do not have more than 10 year investment horizon, then you can still subscribe to the IIFCL bonds which carry 8.66% p.a. interest rate for 10 years.
Investor Categories & Allocation Ratio – The investors have been classified in the following four categories and each category will have certain percentage of the issue size reserved during the allocation process:
Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue i.e. Rs. 210 crore is reserved
Category II – Non-Institutional Investors (NIIs) – 25% of the issue i.e. Rs. 525 crore is reserved
Category III – High Net Worth Individuals including HUFs – 25% of the issue i.e. Rs. 525 crore is reserved
Category IV – Resident Indian Individuals including HUFs – 40% of the issue i.e. Rs. 840 crore is reserved
NRI Investment – Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue.
Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.
Lock-in Period, Premature Redemption & Listing – There is no lock-in period with these bonds, but at the same time, you cannot redeem these bonds back to the company before their maturity period gets over. In order to encash your investment before maturity, you’ll have to compulsorily sell these bonds on the stock exchange(s) where they have been listed for trading.
The company has decided to get these bonds listed only on the National Stock Exchange (NSE) and has got the necessary in-principle listing approval for the same on December 20, 2013. The company will get these bonds allotted and listed within 12 working days from the closing date of the issue.
Demat/Physical Option – Though it is mandatory to have a demat account to sell/trade these bonds, you can subscribe to them in physical/certificate form as well and keep them till maturity. Interest will still get credited to your respective bank accounts through ECS.
Interest on Application Money & Refund – NHB will pay interest to the successful allottees on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment, at the applicable coupon rates. Unsuccessful allottees will get interest @ 5% per annum on their refund money.
Face Value of the bonds & Minimum Investment – NHB is the first company this financial year to keep the face value of its bonds as Rs. 5,000 instead of Rs. 1,000. Considering its face value and minimum application size of one bond, an investor is required to invest at least Rs. 5,000 in this issue.
Interest Payment Date – NHB has not fixed its interest payment date as yet and the first due interest will be paid exactly one year after the deemed date of allotment. As the deemed date of allotment will be fixed once the issue gets closed and before the bonds get listed, I will update this post as and when it gets announced.
Should you invest in this issue?
I would say that one should definitely invest in this issue and I have many reasons to justify my view. Here are some of those reasons:
First, NHB issue is ‘AAA’ rated.
Second, you are going to get 9.01% p.a. and 8.88% p.a. coupon rates which are the best 20-year and 15-year rates offered by any AAA rated or AA+ rated issuer till date.
Third, NHB is a wholly-owned subsidiary of the RBI and I don’t foresee the RBI to ever let its subsidiary default on any such bond issue. Also, NHB is the regulator of the housing finance companies, like RBI is for the banks and SEBI is for the capital markets. I don’t think any government would allow any regulator to default on its payments.
Fourth, it is almost certain that the CPI inflation will start falling from next month onwards. If that materialises, we might have G-Sec yields falling quite sharply.
Fifth, IRFC is the next company to launch its tax-free bonds from January 6 and its coupon rates are lower than that of NHB at 8.48% p.a. for 10 years and 8.65% p.a. for 15 years. It is not going to issue these bonds for 20 years either.
Sixth, there are very few good companies left now to issue tax-free bonds this financial year. REC, PFC, NHPC and NTPC have already raised their quota of authorised amount from the markets. HUDCO is also very close to reach its targeted amount. Only IIFCL, NHAI, IREDA, Airport Authority of India (AAI), Ennore Port and Cochin Ship Yard are now left to issue these bonds and their issue sizes are also very small, except NHAI and IIFCL.
Seventh, it is still not certain whether tax-free bonds would see the light of the day next financial year onwards or not. Like 80CCF infrastructure bonds got stopped getting issued from FY 2012-13 onwards, it is possible that the next government decides to stop extending this budgetary support to all such companies.
Eighth, NTPC issue got listed a few days back and that too at a premium. If an issue with coupon rates lower than the NHB issue can trade at a premium, then it is almost certain that these NHB bonds would also trade at a premium on listing.
Ninth, NHB has reasonably strong fundamentals. It reported profit after tax (PAT) of Rs. 450 crore with total income of Rs. 3,030 crore for the period ended June 30, 2013 as against Rs. 387 crore and Rs. 2,492 crore respectively for the period ended June 30, 2012. Its net interest margin (NIM) also improved to 2.25% during this period as against 2.20% last year.
NHB’s asset quality has also been remarkable. Gross NPAs and Net NPAs remained quite close to zero for the periods ended June 30, 2011 and June 30, 2012. Though its gross NPAs and Net NPAs have jumped to 0.53% and 0.45% respectively in the latest period ending June 30, 2013, this relative poor performance was due to one large project exposure slipping into the NPA category. This large account was worth Rs. 179.60 crore out of its total NPAs of Rs. 180.62 crore.
Why you should not invest in this issue?
If I myself decide not to invest in this issue, I would have only one valid reason for that, higher expected coupon rates in the forthcoming issues. If any of you think that the rates would be higher with NHAI bonds or IIFCL tranche III bonds, then you can probably skip this issue. Personally, I would invest my family’s money in this issue and would also advise my clients to do that.
Note: 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 NHB tax-free bonds, you can contact me at +919811797407