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
Tax-Free Bonds, which carry coupon rates as per the G-Sec yield in the market, have suddenly become more attractive post this year’s budget. Finance Minister Arun Jaitley in his Budget speech announced his target to contain the government’s fiscal deficit at 3.5% of GDP in 2016-17. This lower than expected fiscal deficit has resulted in a sharp fall in bond yields in the past one week or so.
Moreover, these bonds will not be available in 2016-17 and probably afterwards as well. This will increase demand for these bonds multifolds. So, before these bonds become part of history, we have two such issues left – one is from NABARD and the other would be from IRFC. I will cover the IRFC issue in another post, let’s have a look at the salient features of the NABARD issue.
Issue Opening & Closing Dates – The issue is opening for subscription on 9th of March, the coming Wednesday and will get closed on March 14.
Size of the Issue – NABARD is authorized to raise Rs. 5,000 crore from tax free bonds this financial year, out of which the company has already raised Rs. 1,500 crore by issuing these bonds through a private placement. NABARD will raise the remaining Rs. 3,500 crore in this issue.
Coupon Rates on Offer – 10-year and 15-year G-Sec yields have fallen in the last few days, which has resulted in a fall in the coupon rates of these tax-free bonds as well. This issue will carry 7.29% for 10 years and 7.64% for 15 years.
For the non-retail investors, coupon rate will be lower by 25 basis points (or 0.25%) for the 10-year option at 7.04% and 29 basis points (or 0.29%) for the 15-year option at 7.35%.
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) – 15% of the issue is reserved i.e. Rs. 525 crore
Category II – Non-Institutional Investors (NIIs) – 15% of the issue is reserved i.e. Rs. 525 crore
Category III – High Net Worth Individuals including HUFs – 10% of the issue is reserved i.e. Rs. 350 crore
Category IV – Resident Indian Individuals including HUFs – 60% of the issue is reserved i.e. Rs. 2,100 crore
60% Issue Reserved for Retail Investors – This is something very unique to this issue. As we all know, the retail investors were getting 40% of the bonds reserved in all previous issues. This will be the first issue in which the retail investors will be allotted 60% of the total issue size. I think this is a good step in favour of the retail investors.
NRI/QFI Investment NOT Allowed – Like most of the past issues, Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue as well.
Rating of the Issue – CRISIL and India Ratings consider investing in these bonds to be safe and that is why they have assigned ‘AAA’ rating to the issue. Moreover, 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.
Listing & Allotment – NABARD has decided to get these bonds 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.
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 Bombay Stock Exchange (BSE).
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. To apply in physical or demat form, the applicant is required to fill the physical form and attach the KYC documents along with the investment cheque. KYC documents include a self-attested PAN card copy, a self-attested address proof copy and a cancelled cheque.
Whether you apply for these bonds in demat or physical form, the interest payment will still be credited to your bank account through ECS. Moreover, 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.
No Lock-In Period – After these bonds get listed on the stock exchanges, these tax-free bonds are freely tradable and do not carry any lock-in period, the investors can sell them at the market price whenever they 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 7.64% p.a. for 15 years, 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 – NABARD will make its first interest payment exactly one year after the date of allotment and the date of allotment will be announced as the company allots its bonds to the successful applicants.
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?
60% of the NABARD issue i.e. Rs. 2,100 crore is reserved for the retail investors. Not 100% sure, but I think it should take at least a couple of days for this issue to get subscribed in the retail investors category. I think many investors would have got the NHAI refunds credited by then.
As the Finance Ministry has a view that these tax-free bonds create some kind of imbalance in the market, especially for our commercial banks, they have decided not to extend such support to these issuers from the next financial year onwards. That makes this issue and the IRFC issue to be the last two opportunities for the investors in the higher tax brackets to make their investments. Such issues will not be available for at least next 18 months or so, even if the government decides to allow their issuances in Budget 2017. So, if you want to invest in these bonds and earn tax-free income, you need to act now and fast.
Application Form for NABARD & IRFC 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 NABARD or IRFC tax-free bonds, you can contact/whatsapp me at +919811797407 or mail me at skukreja@investitude.co.in
Dear Shiv,
Thanks so much for your accurate advance info and precise analysis on your blog.You are my favourite blogger.As rightly predicted by you,NHAI refunded my entire online bid amount for even its second tranche as I bid on the second day.But the refund was very timely as I could utilise the same to make an online bid for the IRFC TFB tranche II issue on the first day.Thanks to your alerts,I could make online bids in the HUDCO TFB tranche II issue and NABARD TFB issue on the first day.Shiv,can I subscribe to any good ELSS issue via SIP through your firm even though I am based in Hyderabad?Yes,your selfless blogging in this commercialised world makes you a rarest of rare genuine financial planner and an expert at that. I particularly urge all the NCR based investors following Shiv’s blog to forget others and become clients to Shiv.
I agree with Dr. Sharma. Though this blog is part of Shiv’s business, he has shown lot of commitments in answering many questions patiently without expecting any return. I am sure the Goodwill of some of the followers like Dr. Sharma will be an asset for Onemint and I wish all the best to Shiv and team.
Thanks a lot George for your encouraging words and wishes !! I’ll pray to the God that He keeps me mentally and physically fit to keep serving all the readers of OneMint! Thanks again! 🙂
Thanks a lot Dr. Sharma! It is one of the biggest compliments I have got here on this forum. Thanks again for your kind words! 🙂
Also, I’ll soon mail you a link to initiate an SIP investment in a good ELSS of your choice.
Thanks Shiv for your consistently relevant updates on TFB. I started subscribing to your posts from 2014. Great work.
1) can you please point me to the link/url for the post where you had published the interest rates for TFB issues in 2014 and also if you have one for 2016
2) would be great if you can analyse/share insights on some consistently best performing equity oriented MF’s to start SIPs in
I was thinking that these can be a good bet
1. Large cap – Franklin India Bluechip Fund
2. Large and mid cap – Birla Sun Life Frontline Equity Fund
3. Hybrid equity – HDFC Balanced Fund
4. Mid and small cap – HDFC mid cap
5. Mid and small cap – Franklin India smaller companies fund
6. Mid and small cap – Motilal Oswal MOSt Focused Midcap 30 Fund – Regular Plan
7. Mid and small cap – Mirae Asset Emerging Bluechip Fund – Regular Plan
8. Mid and small cap – ICICI Prudential Value Discovery Fund
Hi Shiv,can you please point me to the link/url for the post where you had published the interest rates for TFB issues in 2014 and also if you have one for 2016
Thank you so much.
Hi RS,
Here you have the link to that post – http://www.onemint.com/2014/02/01/tax-free-bonds-fy-2013-14-interest-payment-date-date-of-allotment-maturity-date-bse-code-nse-code-other-info/
I’ll soon try to cover a post having some of the consistently performing mutual funds and their other relevant details.
Thanks Shiv! and kudos to your passion and the effort you make responding to the comments and advising the readers.
Thanks RS for your motivating words! 🙂
Shiv, you deserve thanks! If you had an office in Bangalore, I would have invested in tax free bonds thru you.
Thanks RS! 🙂 My bad luck that I don’t have an office in Bangalore !! I really get many queries from Bangalore and Mumbai, but not enough from Delhi/NCR. God please help me! 🙂
Maybe one day you will have offices in mumbai and bangalore as well! best wishes 🙂
Thanks a lot for such good wishes RS !! 🙂
Day 3 (March 11) subscription figures:
Category I – Rs. 5,630 crore as against Rs. 525 crore reserved – 10.72 times
Category II – Rs. 5,296.84 crore as against Rs. 525 crore reserved – 10.09 times
Category III – Rs. 1,428.87 crore as against Rs. 350 crore reserved – 4.08 times
Category IV – Rs. 1,852.40 crore as against Rs. 2,100 crore reserved – 0.88 times
Total Subscription – Rs. 14,208.11 crore as against total issue size of Rs. 3,500 crore – 4.06 times
Today closing of 3rd day subscribe details please…NABARD TFB.
above indicates that 100% allotment for retail on first day as well as 2nd day
3rd day as well Mr. Varma and I think it should be Day 4 as well.
Day 2 (March 10) subscription figures:
Category I – Rs. 5,630 crore as against Rs. 525 crore reserved – 10.72 times
Category II – Rs. 5,296.67 crore as against Rs. 525 crore reserved – 10.09 times
Category III – Rs. 1,420.80 crore as against Rs. 350 crore reserved – 4.06 times
Category IV – Rs. 1,724.54 crore as against Rs. 2,100 crore reserved – 0.82 times
Total Subscription – Rs. 14,072 crore as against total issue size of Rs. 3,500 crore – 4.02 times
Hi Shiv,
Just clarification needed on your calculation of Effective tax yield calculation you mentioned here.
Example , take 15 yr bond(7.64%) with 20.6% tax bracket.
So effective tax yield should be 7.64 + ( 7.64 *(20.6/100) ) = 7.64+1.57 = 9.213%.. But you have mentioned as 9.62%. Correct me if am wrong.
Hi Raja,
If I pay 20.60% tax on 9.213%, I am left with 7.315%, whereas when I pay the same tax on 9.622%, I have 7.64% with me.
For taxable income..you earn 100 and receive (100-20.6) = 79.4 cash in hand
So the 7.64% cash in hand is equivalent to 79.4..the pretax earning should be 100 or more correctly 7.64/79.4*100 = 9.622%.
Good calculation. In simple words. Thanks.
nicely explained 🙂
Mr. Shiv, For instance can a retail subscriber apply on Day#1 for an amount of Rs 1 Lakh & then on Day#2/3 another Rs.9 Lakhs if additional funds become available subsequently? Why does ICICI Direct not permit this?
Yes S.K., it is possible to submit multiple applications for a single issue. However, I don’t know the reason why ICICI Direct or other brokers do not allow it for online applications. You can do so by submitting physical applications though.
In case of multiple applications, how will Bonds be allotted on both applications (methodology).
Can you provide more information on INFLATION LINKED BONDS, how to buy them, how/where are they listed etc? Are these better than TFBs & FDs & if so, how?
Hi S.K.,
Allotment for multiple applications of the same investor will happen in the same way as it happens for different applications of different investors. Full allotment will happen if the retail category is not subscribed on that day and pro rata allotment will happen for the day it gets oversubscribed.
Here you have the link for the Inflation Indexed National Saving Securities – http://www.onemint.com/2013/12/23/inflation-indexed-national-saving-securities-cumulative-iinss-c-december-2013/
Disappointed, apparently, these inflation linked bonds were originally only open for subscription & are not traded in the market.
If retail portion is not oversubscribed, then you can cancel first order in ICICIdirect and then place new order for total amount.
It is a risk, cancelling your first application and then getting partial allotment in your second application.
In fact, in ICICI DIRECT we cannot cancel the order, since it lues in ‘ordered status’ for a little while & then gets ”EXECUTED’.
In ICICI Direct, we cannot put multiple orders for the an IPO.
Do other service providers like KOTAK, HDFC; SHARE KHAN, ANGEL BROKING have this facilty of allowing multiple Subscription orders for an IPO?
Mr. Shiv, can 1st order be online through ICICI DIRECT & asubsequent order in physical form? Is it allowed? Will both orders not be cancelled due to disqualification.
I have done that multiple times and had no issues to get allotment. Applied first through ICICI Direct on first day online. When additional funds was available , you can apply offline with any other vendor ( SBICAPS , ICICI Direct etc) and can get allotment. No disqualification at all. Only risk is for your second application , you may not be get full allotment depending on how the subscription fares on the day.
Regards
Ramadas
Yes, that’s right S.K., you can submit second application in physical form and it will not get rejected. We also provide such service to our clients.
In Kotak you can submit another application online. But allocation depends on availability in that category. They previously used to restrict but that has been removed for quite some time.
Thanks Ash for this info!
Mr. Shiv, could you please explain why market prices of Tax Free Bonds have suddenly shot up in past few days, for instance recent issue of NHAI is now @1025 from 1010 earlier. Are these prices likely to come down in next few days?
2) In case, we need to buy TFB’s from open market, what should be the strategy so as to buy at lowest prices of the day? Like buy during what time period of the day, which TFB’s to select to buy etc?
3) If you were to buy from Market, which 5 TFB’s would you select & why?
4) Are the YTMs provided by BSE & NSE accurate? Please explain how YTM is arrived at in an easy manner.
Hi S.K..
1. Market prices of tax free bonds are rising due to a fall in the government bond yields, which in turn is a result of the government’s target of a lower fiscal deficit target of 3.5% for FY 2016-17. I don’t foresee any reason for these prices to come down as sharply as they have risen.
2. I don’t know about any such strategy or any such time period to buy these bonds at their lowest price during any given day.
3. Sorry, I won’t be able to comment on such a query here on this forum.
4. YTMs provided by these exchanges are correct in most of the cases. But, one should be very careful about it and do his/her own calculations before taking any investment decision. Please check this link for YTM calculation – http://www.onemint.com/2012/07/25/how-to-calculate-yield-to-maturity-of-a-bond-or-ncd/
Dear Mr. Shiv,
Thank you. Would be grateful if you could reconsider and respond to Query No. 3 above since it would be beneficial to All your fans especially since it pertains to the Same Subject of Tax Free Bonds being discussed in the blog/forum:
3) If you were to buy from Market, which 5 TFB’s would you select & why?
Will he grateful for your kind response please.
Sorry S.K., won’t be able to name any issue. But, I would go for those bonds which carry highest YTMs, issued by professional companies and carry good liquidity.
I believe, the price of tax free bonds also includes the accumulated interest. Therefore, the bond price rises as interest payment date approaches. Shiv any comments?
Regards,
That’s right Shirish, it is definitely one of the reasons. But, a sudden sharp surge in bond prices cannot be attributed to interest accrual. S.K. probably wanted to know the reason for a sharp rise in their prices.
splendid subscription even better than nhai 7.69% issue I think that news that there will be no taxfree status for these bonds next year works here isn’t it shiv
Yes Nitesh, probably that has played a significant role. Falling bond yield has also played a very important role.
Day 1 (March 9) subscription figures:
Category I – Rs. 5,630 crore as against Rs. 525 crore reserved – 10.72 times
Category II – Rs. 5,274.25 crore as against Rs. 525 crore reserved – 10.05 times
Category III – Rs. 1,415.98 crore as against Rs. 350 crore reserved – 4.05 times
Category IV – Rs. 1,551.32 crore as against Rs. 2,100 crore reserved – 0.74 times
Total Subscription – Rs. 13,871.54 crore as against total issue size of Rs. 3,500 crore – 3.96 times
I think retail response is good. What do you say sir?
what would be the expected allotment in retail category for Nabard then?
Day 1 investors in retail get full allocation as per the prospectus.
Allotments to the maximum extent, as possible, will be made on a firstcome first-serve basis and thereafter on proportionate basis in each portion, i.e. full Allotment of Bonds to the Applicants on a first come first basis up to the date falling 1 (one) day prior to the date of oversubscription and proportionate allotment of Bonds to the Applicants on the date of oversubscription
Dear Nn,
Very useful information, on how allotments are done – Thanks
Thanks Nn for your inputs!
Hi RS,
Day 1 retail applicants will get 100% allotment in the NABARD issue.
Yes, a good response! Maybe would have been fully subscribed, in retail category too, if earlier issue refunds had been received by all. -KS
Yes, good response from the retail investors. But, a super response from the institutional and corporate investors. I wonder why the government sell its valuable PSUs at such a low valuations and why don’t they borrow money from the investors by issuing such tax-free bonds at 7-7.5% and invest this money for infrastructure development. Rs. 13,871.54 crore or more could have been raised in a single day. Amazing stuff!
Dear Shiv:
Greetings again.
As always, thanks for maintaining this fantastic blog.
Can you please advise on whether day 1 retail subscribers for NABARD will get 100% allotment as it was only 0.74 times subscribed in retail category at end of day 1?
Likewise, can you also guide (after close of market, today) on what is the expected position for day 1 retail subscribers for IRFC will get 100% allotment?
Sincerely,
SKR
Thanks Sandeep!
Yes, Day 1 NABARD applicants will get 100% allotment. Also, I think Day 1 IRFC applicants will also get 100% allotment. Will keep this post updated.
today’s subscription figures please
Subscription in retail category reaches 1366.6 crores at 5 PM. Expect full allotment if applied today and possibly tomorrow.
Clarification : vishal and Vishal are different person .
don’t assume to be one person
Sure
Subscription has suddenly gathered pace, it is subscribed by Rs. 1328 crore now in the retail category at 4 p.m.
Hi Shiv, what’s the expected allocation for application on day 1 for NABARD?
Can one expect 100% allocation?
Retail portion is subscribed 40% till now. Overall subscription is 115% thus far.
If you apply now, in retail category, you may get full allotment.
Hi SG,
Going by the trend so far, you will get 100% allotment even if you bid for it on Friday.
Thanks so much for the wonderful work!
Thanks SG!
sir can you tell what is listing price of nabard TFB OF 7.64% 15 YEARS
Hi Vishal,
NABARD bonds are yet to get listed on the stock exchanges, so I cannot tell you its listing price. The issue has opened today itself for subscription. You mean face value of NABARD bonds?
expected listing price
I think NABARD bonds should get listed between Rs. 1,010-1,020.
Only 24% subscription in retail category still..
Yes, I think the response is below expectations. Investors must be waiting for HUDCO refunds.
http://economictimes.indiatimes.com/markets/bonds/nabard-tax-free-bond-offers-up-to-7-64-draws-huge-response-20-sold-in-30-mins/articleshow/51323019.cms
http://www.bseindia.com/markets/publicIssues/DisplayIPO.aspx?id=1073&type=DPI&idtype=1&status=L&IPONo=1149&startdt=3/9/2016
watch live status ..NABARD