HUDCO 7.69% Tax-Free Bonds – Tranche II – March 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

It seems like the hunger for tax-free bonds is just growing unabated and whatever the issue size be it would be gobbled up by the investors on the first day itself. HUDCO will launch its second issue of tax-free bonds from 2nd of March i.e. the coming Wednesday and though the company has fixed March 10 to be the closing date of this issue, I think there is no need to emphasize here on this forum that nobody should expect to get any allotment if the bid is not made on the first day itself.

It will be the ninth such issue of tax-free bonds for the current financial year, but none of the issues has lasted for more than one day to get oversubscribed, except for the NHAI Tranche I in December. Though I think for any issue to last for more than one day the quota for the retail investors has to be more than Rs. 2,000-2,500 crore, this issue has only Rs. 715 crore for the individual investors investing Rs. 10 lakhs or less.

Here are the main features of HUDCO Tax-Free Bonds Tranche II:

Size of the Issue – Out of Rs. 5,000 crore allocated to HUDCO to be raised this financial year, 70% i.e. Rs. 3,500 crore should be raised through public issues. HUDCO raised Rs. 1,711.50 crore through its first public issue in January and it will raise the remaining Rs. 1,788.50 crore in this issue.

Coupon Rates on Offer – HUDCO issue will carry coupon rates which are absolutely same as offered by NHAI in its issue which got closed yesterday – 7.29% for the 10-year option and 7.69% for the 15-year option. Like the NHAI issue, this issue also will not offer the 20-year option.

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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, as it was the case in the NHAI issue as well.

Rating of the Issue – CARE and India Ratings have assigned ‘AAA’ rating to the issue, indicating that the issue is quite safe to invest and the company is highly likely to pay its debt obligations in a timely manner. Also, these bonds are ‘Secured’ in nature and 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 – Again, Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are 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. 357.70 crore

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved i.e. Rs. 357.70 crore

Category III – High Net Worth Individuals including HUFs – 20% of the issue is reserved i.e. Rs. 357.70 crore

Category IV – Resident Indian Individuals including HUFs – 40% of the issue is reserved i.e. Rs. 715.40 crore

Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first-come-first-served (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 – HUDCO bonds will get listed only on the Bombay Stock Exchange (BSE). The company will allot the bonds and get them listed within 12 working days from the closing date of the issue.

Demat A/c. Not Mandatory – 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 as well. Whether you apply for these bonds in demat or physical form, the interest payment will still be credited to your bank account through ECS.

Also, even if you get these bonds allotted in an electronic form, you have the option to rematerialize your holding in physical/certificate form if you decide to close your demat account in future.

No Lock-In Period – These tax-free bonds are freely tradable and do not carry any lock-in period. The investors may sell them at the market price whenever they want after these bonds get listed on the stock exchanges within 12 working days of the closing date.

Interest on Application Money & Refund – Successful allottees will earn interest at the applicable coupon rates on their application money, 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 – HUDCO will make its first interest payment on December 15 this year and subsequent interest payments will also be made on December 15 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?

Budget 2016 will be presented in the parliament on February 29 and we will get to know whether we will have these tax-free bonds available or not for the next financial year. In case the finance minister Mr. Arun Jaitley decides against extending this facility to these public sector units, then I think there will be a rise in the demand for the already listed tax-free bonds and hence, we can expect a rise in their market value as well.

Also, a higher fiscal deficit number will result in an increase in bond yields, which in turn will result in a higher coupon rates for the IRFC and NABARD issues. So, in case there is a jump in bond yields, then you should wait for the these two issues to decide on your final investments. I’ll update this post on March 1 after the climax of Budget 2016 gets revealed.

Expected Launch Date of IRFC and NABARD Issues – 2nd week of March

Application Form for HUDCO 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 HUDCO tax-free bonds, you can contact me at +919811797407

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314 thoughts on “HUDCO 7.69% Tax-Free Bonds – Tranche II – March 2016 Issue”

  2. Hope sharing knowledge and experience helps everyone in the forum. But if we were to test the knowledge, then it will be futile. Lets use this forum for better benefits of everyone. I have been part of this from the very beginning of second issue of TFB and found useful. Many come and leave based on their requirement. I continue to share my thoughts even if I am not investing in some of the issues.

    Reply

  4. very correct dear Ashok that to interest is taxfree no not to worry about tds and directly interest credited in your bank account no paper work and that to for 15 to 20 years it is far better than investment in a real estate for steady income because no safe investments can give this type of income because if you purchase an apartment for 20 lacks by full cash and rent it out which will give maximum rent of 75-80 thousands yearly but in taxfree bonds it can give at least 150000-175000 yealy taxfree no maintenance of apartment no cooperation taxes I generally invest interest of these taxfree bonds in another year taxfree bonds or in ppf coments please shiv am I right shiv

    Reply

  5. Frankly speaking I consider the TFBs are good only for the investors, does not make any sense for the government. TFBs issued in the past would actually turn out to be a burden for the government in the coming years. Imagine several thousand crores of TFBs were issued for 9% few years ago. Where do we get secured 9% interest any where. Anyhow, let us use the opportunity till the government offers TFBs.

    Reply

    1. Ashok, It is wrong to say that the TFB help only investors. The TFB are issued by Infrastructure development cos. raising the resources from within for the development and needs to pay the coupon annually. The interest paid is not high in India considering the inflation and interest rate. People park their money in TFB considering the Tax free returns. 9% was given when the banks were offering interest rate between 9.5 to 10% with an annual yield on 10% to 10.5%. The TFB coupon rates are always offered 50 bps less that the Govt bonds. More over there is a risk when some one buys the TFB at the prevalent rate locking the capital for long term. So do not think that the concept of TFB was only to help investors.

      Reply

      1. Very well said.

        Not to forget the fact that Govt does not have so much money in the first place to invest and its fiscal deficit numbers would slip if it is not going for TFB. If these companies have to borrow so much money where would they go to and what is the interest the charge and what would the impact this will have on govt ratings?

        What if interest rates go up again? For eg. 3 years back REC TFB was issued at around 7.5% and later interest rate went up and and next year REC TFB was issued at 8% + . So investors are at loss if interest rate goes up.

        So assumption that TFBs are always good for investors is a wrong opinion.

        Its liquidity is very very low.

        Also fixed deposit gets compounded quarterly. But in TFB it is yearly interest rate and the yield hence is low compared to coupon rate.

        -Praveen

        Reply

        1. Mr.Praveen, thanks for your thoughts, but do you believe that the Interest rates would go up in the future. I don’t think so. If we bench mark our bank interest with all major banks in the world, no bank gives us the interest our bank gives us even today. I have no doubt the bank interest would have to keep going down year on year. In fact auto manufacturers want the loan lending rates to be reduced to improve consumer spending. Have you heard of negative bank interest system adopted by some banks in Japan for the borrowers. ?

          Reply

          1. I gave you an instance and George has also shared his experience. Hope this answers you question on interest rate.

            Do you know that Japan is a developed country?
            Do you know the GDP in Japan and GDP in India and how different we are?
            Do you know that Japan is a surplus country which depends on giving loans to other countries but India is a country which needs lots of money and is hungry for investments be it FIIs, FDIs or loans from WB, IMF, Japan etc…

            Anyway you are digressing too much..

            >>but do you believe that the Interest rates would go up in the future
            And to answer your other question , I am not an astrologer to accurately predict what will happen 🙂

            I just try to cover various cases through asset diversification..

            Reply

        2. Yes Praveen. Some of the Tax Free bonds issued in the past are still trading below par. I had Tax free bonds purchased with coupon rates of 7.2 to 7.4 % with 50 Bps increment if retained for retail. It was trading at around Rs 900 for a bond when the 8.92% tax free bonds were released. When I purchased 7.2 % bond that time also everyone claimed that Interest rate will only go down and will not come up. Again any investment depends on what the investor wants. Real estate gives 100% in 3 years some time, but stays stagnant or go down for next 5 years. Property returns can not be measured by rent considering the appreciation or depreciation on the asset. Same goes with equity or Gold.

          Reply

          1. Nobody knows where the interest rates are headed, but in a world where most countries are fighting deflation and struggling to grow beyond 2-4%, I think Indian inflation of more than 6-8% is unacceptable. The government should encourage equity participation and should not provide subsidized rate of interest.

            Reply

      2. Hi George,
        Personally I think 7.69% tax-free rate of interest is on a higher side. It is equivalent to 10% taxable rate of interest for the investors in the 30% tax bracket. I think the government should work on lowering inflation numbers rather than providing higher subsidized rate of interest.

        Reply

        1. Shiv, I also agree in current situation 7.6% is definitely good interest rate. If I can hold for full term it will give right cash flow and definitely a good investment. If inflation is low, one need not be worried about interest rate. Let us hope for the best.

          Reply

  6. The government on Wednesday clarified that the bonds that infrastructure finance companies have been allowed to issue in the next financial year would not have a tax-free status.

    “These bonds will not be tax-free. Tax-free bonds distort the market,” secretary in the department of economic affairs Shaktikanta Das said.
    need your comments dear shiv….

    Reply

    1. Hi Dr. Puneet,
      I think the government is right in stating that these tax-free bonds distort the market. But, to correct that, I think they should have changed the methodology to calculate their coupon rates. I also think the government’s logic applies to the post office schemes also. PPF, Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme, all these schemes carry artificially higher rate of interest. So, the government should act on that front also.

      Reply

  9. Day 2 (March 3) subscription figures:

    Category I – Rs. 3,195 crore as against Rs. 357.70 crore reserved – 8.93 times
    Category II – Rs. 2,382.81 crore as against Rs. 357.70 crore reserved – 6.66 times
    Category III – Rs. 1,245.22 crore as against Rs. 357.70 crore reserved – 3.46 times
    Category IV – Rs. 1,422.10 crore as against Rs. 715.40 crore reserved – 1.99 times
    Total Subscription – Rs. 8,245.12 crore as against total issue size of Rs. 1,788.50 crore – 4.61 times

    Reply

  10. Thank You Shiv,
    One more thing, Most TFBs says “first come first served”, does it mean apply ” just after midnight-12AM ” IST or After 10 AM of starting bidding?
    kind regards

    Reply

    1. Paulose , this was clarified many times. Have a look in the earlier responses for the different TFB issues and many of the doubts will be clarified. First come first is any time in a given day. If applied between 10AM and 5PM , all are considered equal for that day. Again most of the brokerages for online application the cut-off time is 3:30PM. Hope this clarifies. Basically based on current trend , apply on first day between 10 and 3PM, you will get the proportionate allotment any retail investor gets.

      Reply

        1. You are welcome Paulose. I understood that and suggested you to have a look at all postings regarding TFB. That will give you a better idea.

          Reply

  11. Dear Shiv
    Thank you for the timely helpful informations for the readers. Wonderful job.
    How many days it will take the refund from Last NHAI 2nd issue closed 3 days ago?
    kind regards

    Reply

  13. I want to know that all the three credit agencies care crisil and icra have given nabard taxfree bonds 2016 “AAA” or not dear shiv because I generally invest only if al these rating agencies have given AAA rating to an issue specially icra so please clear my doubt shiv

    Reply

  14. Hi Shiv,
    Nice article..
    You are doing great service and helping your readers by spending precious time of yours and that too promptly.

    Regards
    Praveen

    Reply

  16. Thanks Shiv!!

    I applied via ICICIdirect at 4:46 pm. Would ICICI have submitted that application real-time on-time or do you think this will be applied tomorrow, so in that case no allotment

    Reply

  18. Day 1 (March 2) subscription figures:

    Category I – Rs. 3,195 crore as against Rs. 357.70 crore reserved – 8.93 times
    Category II – Rs. 2,382.72 crore as against Rs. 357.70 crore reserved – 6.66 times
    Category III – Rs. 1,237.72 crore as against Rs. 357.70 crore reserved – 3.46 times
    Category IV – Rs. 1,401.89 crore as against Rs. 715.40 crore reserved – 1.96 times
    Total Subscription – Rs. 8,217.32 crore as against total issue size of Rs. 1,788.50 crore – 4.59 times

    Reply

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