NHAI 7.69% Tax-Free Bonds – Tranche II – February 2016 Issue

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

2016 so far has turned out to be a nightmare for the equity investors. Portfolios have undergone a massive value erosion and sentiment has turned extremely negative. Financial advisors, who were recommending a higher allocation to equity so far, have also become cautious to advise higher equity investments. Some analysts have started calling it a bearish phase and not just a deep correction in a bullish phase.

However, it is not just the equity portfolios which are bleeding. Debt portion of portfolios are also facing the music. Past few months have seen the 10-year G-Sec yield rising to 7.95% from a range of 7.60-7.65% in September last year. Due to a scary fall in international crude prices and commodity prices like steel, aluminium etc., many companies are facing it difficult to service their debt. Credit rating agencies have also started downgrading these companies resulting in a fall in the NAVs of debt mutual funds which have lent huge money to such companies.

In such a difficult environment, investors want to opt for safer investment options and it seems that tax-free bonds are among the best options available. NHAI is launching one such issue from 24th February i.e. Wednesday and the issue is scheduled to get closed on the first of March. NHAI will raise Rs. 3,300 crore from this issue.

Here you have the salient features of this issue:

Size of the Issue – Though base size of this issue is Rs. 500 crore, NHAI will retain an additional Rs. 2,800 crore in case of oversubscription, thus making it a Rs. 3,300 crore issue. NHAI has already raised approximately Rs. 15,700 crore by issuing tax-free bonds through its public issue in December and a couple of private placements in September 2015 and February 2016.

With this Rs. 3,300 crore issue, NHAI will exhaust its full quota of Rs. 19,000 crore for the current financial year.

Coupon Rates on Offer – With a widening gap between the 10-year G-Sec yield and 15-year G-Sec yield, NHAI issue will carry 7.69% coupon rate for 15 years and 7.29% for 10 years. As with its first issue, 20-year investment option will not be there this time as well.

For the non-retail investors, coupon rate will be lower by 25 basis points (or 0.25%) for the 10-year option and 30 basis points (or 0.30%) for the 15-year option.

Rating of the Issue – CRISIL, ICRA, CARE and India Ratings have once again assigned ‘AAA’ rating to this issue. Also, these bonds are ‘Secured’ in nature i.e. in case of any default, the bondholders would carry a right to make claim on certain assets of the company.

NRI/QFI Investment Not Allowed – Like its previous issue, Non-Resident Indians (NRIs) won’t be able to make investment in this issue as well. Qualified Foreign Investors (QFIs) are also not eligible to invest in this issue.

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) – 20% of the issue is reserved i.e. Rs. 660 crore

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved i.e. Rs. 660 crore

Category III – High Net Worth Individuals including HUFs – 20% of the issue is reserved i.e. Rs. 660 crore

Category IV – Resident Indian Individuals including HUFs – 40% of the issue is reserved i.e. Rs. 1,320 crore

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.

Listing & Allotment – NHAI has again decided to get these bonds listed on both the stock exchanges i.e. National Stock Exchange (NSE) as well as Bombay Stock Exchange (BSE). Bonds will be allotted and get listed on the exchanges within 12 working days from the closing date of the issue.

Demat A/c. Not Mandatory – Again, it is not mandatory to have a demat account to apply for these bonds. Investors have the option to subscribe to these bonds in physical form also. Also, even if you get these bonds allotted in your demat account, you have the option to rematerialize your holding in physical/certificate form if you decide to close your demat account in future.

However, whether you apply for these bonds in demat form or physical form, the interest payment will still get credited to your bank account through ECS.

No Lock-In Period – These tax-free bonds do not carry any lock-in period and you can buy/sell them on the stock exchanges at the market price whenever you want.

Interest on Application Money & Refund – Successful allottees will earn interest at the applicable coupon rates i.e. 7.29% p.a. for 10 years and 7.69% p.a. for 15 years, 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.

Minimum & Maximum Investment – Investors are required to put in a minimum investment of Rs. 5,000 in this issue i.e. at least 5 bonds of face value Rs. 1,000 each. There is no upper limit for the investors to invest in this issue. However, an investor investing more than Rs. 10 lakhs will be categorized as a high networth individual (HNI) and will get a lower rate of interest as applicable.

Interest Payment Date – NHAI will make its first interest payment on October 1 this year and subsequent interest payments will also be made on October 1 every year, except the last interest payment, which will be made to the bondholders along with the redemption amount on the maturity date.

Record Date – For the payment of interest or the maturity amount, record date will be fixed 15 days prior to the date on which such amount is due to be payable.

Should you invest in this issue?

I think tax-free bonds are one of the best fixed income options available for the retail investors. There is no fixed income option which carries so many distinct advantages which these bonds have, like tax-free interest, easy liquidity, favourable tax liability if sold after holding for more than one year, scope of capital appreciation, annual interest payments etc. Risk-averse investors with a long term view should definitely invest in these bonds.

Also, there is no certainty that these bonds will be allowed to be issued next year as well. For that, we’ll have to wait for the Budget speech on February 29. In case the Finance Minister decides not to allow these bonds for the next year, it will result in a sharp increase in their demand. Also, as there is a difference of 0.40% between the interest rates of 10-year bonds and 15-year bonds, I think it makes more sense to subscribe to the 15-year option.

Application Form for NHAI Tax Free Bonds

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 NHAI tax-free bonds, you can contact me at +919811797407