HUDCO 7.64% Tax-Free Bonds – Tranche I – January 2016 Issue January 21, 2016 by
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 [email protected]
In the last 10 trading days or so, some major stock markets all over the world have plunged more than 10%. I think this could be the worst fall for the global stock markets since 2008-09, when the US economy was badly hit by the subprime mortgage crisis. In India also, stock prices across sectors have fallen 20-40% in a very short span of time to touch their lowest levels since August 2013.
Investors are scared to check their stock portfolios as there is a big value erosion out there and margin calls have started to get triggered. As the situation is turning from bad to worse, investors are looking for safe havens to protect their hard-earned money. In such a scenario, what could be a safer place to park your money than ‘AAA’ rated tax-free bonds issued by a government company.
HUDCO will be launching its public issue of tax-free bonds from January 27, offering a coupon rate of 7.64% for 15 years and 7.27% for 10 years. The company will try to raise Rs. 1,711.50 crore in this offer, including the green-shoe option to retain oversubscription to the tune of Rs. 1,211.50 crore. Though the issue is scheduled to close on February 10, I think it should get oversubscribed on the first day itself in all the four categories of investors.
Before we analyse it further, let us first check the salient features of this issue:
Size of the Issue – HUDCO is authorized to raise Rs. 5,000 crore from tax free bonds this financial year, out of which the company has already raised Rs. 1,288.50 crore by issuing these bonds on a private placement basis during July-October period.
Out of the remaining Rs. 3,711.50 crore, the company will try to raise Rs. 1,711.50 crore in this issue. However, it is still not clear whether HUDCO would raise the remaining Rs. 2,000 crore this financial year or surrender the allocated amount back to the government.
Rating of the Issue – CARE and India Ratings have assigned ‘AAA’ rating to the issue, thus suggesting that these bonds carry highest degree of safety regarding timely payment of financial obligations. 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.
Coupon Rates on Offer – NHAI, which was the last ‘AAA’ rated issue this financial year, offered 7.60% coupon for its 15 years option and 7.39% for 10 years. As 10-year G-Sec yield has fallen and 15-year G-Sec yield has risen since then, HUDCO bonds will carry 7.64% for the 15-year option and 7.27% for the 10-year option.
For the non-retail investors, these rates would be lower by 25 basis points (or 0.25%).
NRI/QFI Investment Not Allowed – Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue as well.
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. 342.30 crore
Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved i.e. Rs. 342.30 crore
Category III – High Net Worth Individuals including HUFs – 20% of the issue is reserved i.e. Rs. 342.30 crore
Category IV – Resident Indian Individuals including HUFs – 40% of the issue is reserved i.e. Rs. 684.60 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 – Bombay Stock Exchange (BSE) is the only stock exchange where HUDCO bonds will get listed. 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/certificate form as well. Whether you apply for these bonds in demat or physical form, the interest amount will still get credited to your bank account directly through ECS.
Also, even if you get these bonds allotted in your demat account, you will have the option to rematerialize your bond 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 i.e. 7.27% 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 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 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?
Global crude oil prices have plunged to their lowest levels since May 2003 and are currently trading at $26.76 per barrel as I write this line. Commodity prices are also falling sharply as China has suffered from its slowest GDP growth in 25 years. 10-year treasury note yield in the US has fallen below 2%, even as the US Fed has announced its decision to hike interest rates there. All these events suggest that there is a major demand slowdown out there which could potentially push some of the major economies back into some kind of recessionary environment.
Amid such a cruel slowdown, I am surprised (and disappointed also) how India is still having a high CPI inflation and why the RBI is still reluctant to cut interest rates when the economy badly requires low levels of rates in order to keep floating for survival. I strongly believe that there is an urgent requirement for the RBI to cut interest rates and not to wait for its next monetary policy on February 2nd to take any such action.
I think HUDCO issue is an opportunity for the risk-averse investors to invest their money for a healthy tax-free return for a long period of time. This could be one of the last couple of issues available for the investors this financial year to earn a risk-free income. Moreover, if the RBI obliges with a 25 or 50 basis points rate cut, we could see coupon rates falling sharply in the next bond issue by NHAI.
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
Lot of response for hudco tax free issue .Better to buy in secondary market different company.
Cummulative Series and Quantity for Housing and Urban Development Corporation Limited
At BSE-NSE
Last updated on
Jan 27 2016 11:00AM
Series BSE + NSE Quantity
Series1 9,36,293
Series2 40,27,655
Series3 7,12,034
Series4 21,39,048
Total 78,15,030
Hi Shiv,
One query on the above and like Tax free NCDs. In case of event of death of the investor (retail investor), are we likely to get the principal back on maturity and how. is there any process. or do we forego the entire amount. Is the NCDs paid back to the Demat account holder or the nominee registered with the Demat holding bank(e.g ICICI securities )
Hi Anonymous,
There is nothing to be worried in case of the unfortunate demise of the applicant. In such cases, bond entitlement changes from the applicant to the nominee/legal heir of the applicant. The investment amount/interest remains 100% safe.
Dear Mr. Shiv Kujreja,
Could you please confirm the following or clarify further:
1) Int. On TFB’s is to be shown under ‘EXEMPT INCOME: Interest’ in ITR.
2) Dividend earned on LIQUID MF’s Daily Dividend Scheme on which Tax is already deducted @28.5% is also to be shown under ‘Exempt Income: Dividends’ in our ITR.
Thank you for answering our queries.
Hi S.K.,
1. Yes, that is correct.
2. Yes, this is also correct.
Hi Shiv,
I have one question – NHAI issue that just got listed has an interest date of 01-Apr-2016 and normally the eligible holders get decided 15 days in advance and then the price gets reduced considering the interest part. After the declaration of Interest on 15th March and If I sell the bonds on 16th March. Can I show this a short term loss in my ITR? e.g. price on 15th March – 1030 , price on 16th March – 995. Allotment Price – 1000, so the net loss of Rs 5 (995-1000)? Tax free interest on 1st April.
Thanks in advance for answering!!
Regards
Sanjay
Yes Sanjay, you can do so. There is nothing wrong in it. But, keep in mind the brokerage expenses and other taxes involved.
Thanks for prompt reply.. What do you mean by other taxes involved?? My main purpose is to book a short term loss in this finacial year and also to enjoy tax free interest in 1st April.
I hope this should be fine as per Income Tax laws.
At least for equity shares or mutual funds – The notional loss caused by the dividend payment can be claimed as loss only if the units were bought three months before the record date or are held for at least nine months after dividend payment. If the units are sold before 9 months, the loss will be disallowed under Sec 94(7) of the Income Tax Act. This is what is called “dividend stripping”
I would think something similar we can assume for the tax free bonds.
1. Other taxes include STT and stamp duty etc. which are levied along with the brokerage charges.
2. Yes Sanjay, it is perfectly fine as per the Income Tax laws.
Thanks again.. There is no STT on tax free bonds only brokerage and little bit SEBI, stamp duty charges
Why is it so that NHAI was not subscribed 100% in retail but these are getting over subscribed?
Hi Anuj,
This is primarily due to the issue size and credit rating of the company. NHAI was a big issue of Rs. 10,000 crore. Rest all other companies, including NTPC, PFC, REC, IRFC and IREDA, could raise only Rs. 8,348 crore in 5 of their issues.
Hi Shiv, can I apply directly thru my demat ac online or need to go thru a brokerage firm? What is bidding?
Hi RS,
If online facility is provided by your broker, you can apply for these tax-free bonds directly through your demat account. Bidding is mandatory for your online as well as offline applications. When you apply through your demat account, bidding is done by your broker after your application gets submitted. But, when you apply offline, bidding is required before your application is submitted to one of the designated bank branches. Bidding is a process in which the details of your application get submitted to the exchange and a Bid Id gets generated unique for each application.
Thanks Shiv.
You are welcome RS!
Dear Mr. Shiv Kukreja,
Refunds of Application Amount for NTPC/REC etc TFB’s were accompanied by 2 types of Interest amounts:
1) Interest on ‘Refund Amount’ &
2) Interest on ‘Allotment Amount.’
Please clarify which or both these interest amounts are Tax-Free and how are they to be shown in our ITR.
Thank you.
SK,
Interest on refund amount is paid at 5percent and taxable. It has been paid by deducting 10percent TDS already.
Interest on allotment amount is paid at the coupon rate and non taxable .
Even I would like to understand how to show taxable interest on refund amount on ITR and pay remaining tax as I am in 30percent bracket.
Sandip
That’s not correct Sandip! Both these interest amounts are taxable. It should be treated as interest income under income from other sources in your ITR.
What I understand is that interest at coupon rate is tax exempt for TFB, isn’t it , then why is interest received taxable as mentioned by you, thanks
Sandip
Hi Sandip,
Tax-free interest period will start from the date of allotment till the date of maturity. Interest on application money as well as on refund amount is taxable.
How do we get the details. Does it show up in form 26as ?
I failed to get allotment in IRFC TFB. Ihave parked the fund in ICICI liquid Fund. Is it sensible to redeem and subscribe to HUDCO TFB. The liquid fund carries no exit load.
Thanks for the post.I am no longer waiting for a response. Took a decision to redeem from liquid fund and bid for my application for HUDCO TFB has been uploaded couple of hours back. Awaiting the outcome. I am of course reading the speculations on possible percentage of allotment !
very correct george and also don’t break any rd fd or tax free bonds for a new taxfree bonds because of over subscription you will not get full allotment only 30 40 percent allotment you can get isn’t it dear shiv
Thanks Nitesh.
Liquidating your existing fixed income investment for these tax-free bonds is not advisable, it should be done only on a selective basis. But, for fresh investments, tax-free bonds are good and partial allotment should not be a deterrent.
Shiv, Unfortunately many of us are not able to find fresh investments. Most of the cases it is a trade of with FD, MF etc. When we liquidate one and look for TFB, if reasonable allocation do not happen then we may not find better opportunity to invest in another instrument considering that interest rate is down. Yes I fully agree with you that partial allotment should not be a deterrent provided the fund is available and not made available.
Hi George,
I think one should consider other options only when tax-free bond options are exhausted. I mean you should invest in FDs/RDs/Debt MFs etc. when TFBs are not there. Refunds come in 7-8 working days, so I think we can wait for this much time. Avoiding TFBs due to partial allotment doesn’t make sense to me.
I think my statement was not correct. I meant no money for fresh investments. Most of the time break FD or Redeem MF to meet the cash required.
Personally, I’m breaking recently made FDs to invest in TFBs – since interest lost/penaly will not be more.
And I’m not breaking FDs which are maturing in few months to an year, as significant interest will be lost in such cases.
Yes Chaitanya, same here. FDs that was made or renewed in last 6 months where interest rate was from 7.5 to 8.5% are considered for liquidity. Offcourse , there is interest loss due to short term and also the penalty. So far it was ok since we were expecting new issues. Now we are only left with NHAI and HUDCO 2nd issues. May be some new issues can be expected if the NHAI surrendered portion is given to other companies. Let us hope we will get resonable allocation in HUDCO and as advised by Shiv, I will consider moving some more fund to TFB considering that we do not get this opportunity always.
I think that is the right strategy.
Hi Chaitanya and George,
I did not liquidate my FDs. Instead I borrowed loan on FDs from the banks. The banks charge around 0.5% to 1.25% more than the FD interest rate. There are no processing charges as well. I received the loan amount in 15 minutes. Based on the discussions in this forum, I expected allotment of about 40%. Once I get the refund, I would close the loans. The loan interest charges for 10 days (maximum period for allotment and refund) is very less. Also, I could retain the FDs.
This one is even better. 🙂
Good idea!
This debate of RD, FD and TFB is very interesting. The interest we get on TFB is yearly. When it comes to RD and FD, I feel one should look at yield rather than interest rates alone. Yield would be equal to interest and whether
Sorry for interruption.
This debate of RD, FD and TFB is very interesting. The interest we get on TFB is yearly.
When it comes to RD and FD, I feel one should look at yield rather than interest rates alone as that is right comparison. Yield would be equal to interest if one is taking interest at regular interval in FD. If FD is cumulative in nature, yield would depend upon period and it could be attractive if one is in tax bracket up to 20%. In addition, one may also look at the period left and reinvestment risk while taking such decisions. Therefore breaking FD in a hurry may not be correct.
Comments are welcome.
I have an RD at 9.5% rate of interest. Is it liquidate it to subscribe to HUDCO bond. Iam comming in IT 20% tax bracket.
Is it advisable to liquidate it
RD with 9.5% is really good at current interest levels. Your yield is almost 10% and you will get 8% after 20% tax. Do not break this for TFB. Shiv what you think.
Thanks George.
Hi Pankaj,
I think these tax-free bonds are better than RDs/FDs due to many reasons:
1. There is no TDS with tax-free bonds.
2. There are no premature withdrawal charges.
3. There is a scope of capital appreciation as well in case interest rates go down.
4. You can sell these bonds whenever you need money.
5. Issuers are some big government companies.
Hi Shiv,
the 10 lac limit is it cumulative of all HUDCO subscriptions across various years . I mean assume, i have invested 2 lacs in 2013 in HUDCO NCD and now i can only invest max of 8 lacs so that i will recieve the retail investor coupon rates or i can invest upto 10 lacs again in jan 16 offer.
Hi Anonymous,
Rs. 10 lac limit is for each issue. You can apply for Rs. 10 lac in this HUDCO issue and still earn a higher rate of interest.
It is disappointing to note that NRIs are not allowed in this issue. NRI investors were allowed to invest in all previous Hudco tax free bond issues. Is upgrade of credit rating has something to do with this decision?
Don’t know Shirish why HUDCO has decided to keep the NRIs away.
Subscribing for comments
When are IREDA refunds expected? Will it happen by next monday?
Hi Chaitanya,
IREDA refunds should happen today.
Super, got it exactly that day 🙂
That’s great! 🙂
Looks like it may be 30-40% allocation for retail investors. what do you feel Shiv sir?
Yes Pradeep, even I think it should be in this range only, or probably between 25-35%.
Shiv, If the expectation is below 50% allocation, Is it worth locking the money for just 10-15 basis points considering that most of the recently allotted bonds are trading at 7.5- 7.55% YTM. IRFC is still trading at 1002 -1003 level and 6.5 Rs interest already accrued. If one were to pay 6-7 rs as brokerage still he can expect 7.5%. For a customer who is not having 10 Lakhs worth bonds can still consider buying these bonds from secondary market. The amount will not get locked and no waiting for the refund and allocation. For those who have exhausted retail limit and looking for diversification, it is worth giving a shot. AIR shows full amount in reporting even if 10% allocation happens for all those who apply more than 5 Lakhs which is not fair on the part of the company sharing the info considering that the major amount is refund.
That is true. If somebody applied 1 lakh in 5 issues and gets 10 % in each issue. His investment is just 50,ooo but IT will think he has 5 lakhs.
If your application is of Rs. 5 lakhs, then you have Rs. 5 lakhs, don’t you?
That is true only if it is 100% allocation. We are seeing allotment as less as 13%. Please correct if I am wrong.
when does AIR reporting happen ? Is 5 lac limit per issue or total?
If applied in one company above 5L in single or jt account. If some one applies in 2 joint accounts 10 each. 20 will appear and actual allocation will be 3 or 4. If applied for few companies the amt will look huge whereas the actual will be very low. May be Shiv will have more clarity on this.
Why worry about AIR reporting? If you are paying your taxes honestly, it does not matter what IT dept thinks. We should not be unduly worried about IT scrutiny. Having said that it is important to keep your paperwork in order. The IT dept knows that nothing much comes out of scrutiny of the salaried class and current trend is not many are getting scrutiny notice.
I agree Shirish!
Which one do you suggest to buy – IRFC or NTPC. I am looking for 10 years bond.
George, this one is for you, please respond. Thanks!
If you are particular about 10 Yrs, you can try NTPC but the issue is small volumes and not competitive pricing. I am not monitoring IRFC 10 Yrs bond, but I think you can buy the same.
IRFC 15 Yrs bond is available at reasonable rate and good volume.
How does it matter whether company shows in AIR or not? Anyways you need not pay tax on these bonds interest, so whats there to hide?
I agree Chaitanya!
I do agree with your view on applying , only pointing out to the way of reporting by companies which can project big amount invested where as most of the amount is refund. I am sure the reporting helps in more transparency. It would have been better to report how much was actually allotted also. Any way, it doesn’t matter as you have rightly pointed out.
Hi George,
1. Personally, I would go for the HUDCO issue with all my capacity (obviously up to Rs. 10 lakh). Once I have the final subscription numbers on the first day, only then I’ll decide whether I need to wait for the NHAI Tranche II or go for any other bond issue (including HUDCO) from the secondary markets. Why to go for 7.50% yield when you are getting 7.64%?
2. I don’t care about AIR reporting and I don’t think there is anything unfair here. If I know I’m clean, then why live my life scared about taxmen knocking my door. Tax evaders should feel ashamed about it, rather than scared.
Shiv, I would definitely apply for HUDCO if there is a chance of 50% allotment or above. If that is not the case, I feel the money gets blocked for 2 weeks. I am sure those who have enough money to apply in issues upto maximum retail limit of 10 Lakhs should be able to do so. Since you mentioned the possibility 30-35% allotment, I was feeling that it is better to look for already available bonds rather than waiting for refund and allotment with 5% taxable interest for the period money gets blocked. I was particularly unhappy with the way the partial allotment of NTPC, PFC, REC took place though I did not apply to maximum limit due to fund shortage. At that time there was no other TFB giving 7.5% in the market as well. Looking at the volume of trading happening in PFC,NTPC,REC bonds compared with IRFC & NHAI suggests that the liquidity will determine the price in the market. The price will be reasonable for buyers and sellers. If HUDCO would have come up with 1 trache of 3500 Crore, it would have been much more interesting from the point of Allotment and liquidity. Once again , I would like to appreciate how Shiv made this blog interesting over the years when ever TFB issue was coming up. I can see many of the contributors in this blog are regular and I am one among them. Though I am not a big time investor, I feel proud to be part of this and contribute little bit from my side to this blog and definitely benefited myself also.
Yes, Kudos to Shiv in making this blog interesting with TFBs..
Thanks a lot George, thanks Chaitanya!
Subscribing to comments
Hello Shiv,
I have already been allotted TFB by IRFC and NHAI for 7 lacs ( 10 years)and 10 lacs (15 years) respectively. Should I consider investing in HUDCO further.
Hi Sandip,
That is something you need to decide. You should invest as per your asset allocation. HUDCO issue is also ‘AAA’ rated as IRFC and NHAI issues were. So, if your asset allocation permits you to invest in more of debt, then you should go ahead & invest in HUDCO bonds as well.
Sandip, Shiv answered it apt. If you have enough fund and want to be sure whether Hudco is the right TFB. You should go ahead. Hudco got promoted from AA+ to AAA where as IREDA was AA+. As a retail customer I will not worry much about AAA and AA+. But it all depends on your overall savings and how much you want in TFB.Don’t bet all in one instrument like having all eggs in 1 basket. Have a diversified portfolio of investments and diversified TFB portfolio.
Thanks Shiv and George. I have one more query. What is the best way recommended to utilise annual interest received from TFB by investing it to add up towards the overall maturity date and amount of the principal of TFB.
Thanks
Sandip
Invest in Equity MFs.
Thanks for the update Mr Shiv.
You are welcome Raju!
Hello Shiv:
Would it not be better to buy TFBs with higher interest rate from secondary markets? Even after the higher price and discounting of interest rate for present year, they would – over the balance period (say 12/13/14 years) be giving more than the 7.64% that Hudco is giving now?
Regards,
SKR
Hi Sandeep,
I think all or most of the tax-free bonds are trading at a yield lower than their original coupon rates. In case any of the bonds is trading at a yield higher than HUDCO coupon rates adjusted for brokerage and other expenses, then you should definitely buy those bonds than HUDCO bonds.
Sir,
Can we buy NTPC bond as allocation was just 10%. Will I get same rate as was promised during the issue offering.
Yes Pradeep, you’ll get the same rate of interest, but your total investment should not cross 1000 bonds.