REC is the first company to start offering tax free bonds in this financial year (2012 – 13) and their issue opens on December 3rd 2012 and ends on December 10 2012.
REC has been allowed to raise Rs. 5,000 crore through tax free bonds this year out which they have already raised Rs. 500 crores via private placement and this issue is for Rs. 1,000 crores. So this means that there likely will be another tranche before the financial year ends. However, last year’s experience shows that there is very little variation in the interest rates of even two issuers, let alone two issues from the same company. The interest rate on tax free bonds is also capped to the average G-Sec yield of the same maturity so there’s not much much you can expect in terms of a better rate.
Terms of the REC Tax Free Bond Issue
There are two series of bonds, one with a 10 year maturity and another with a 15 year maturity and then there are 4 categories of investors that can invest in them.
Retail investors get a slightly higher interest rate, and they are under category IV.
Here is a table that shows the details of this issue.
| Particulars |
REC Tranche 1 Series 1 |
REC Tranche 1 Series 2 |
| Face Value |
Rs. 1,000 |
Rs. 1,000 |
| Interest Rate: Retail Investors |
7.72% |
7.88% |
| Interest Rate: Other Investors |
7.22% |
7.38% |
| Tenor |
10 years |
15 years |
| Interest Payment |
Annual |
Annual |
Physical and Dematerialized Form
REC is going to issue the bonds in both physical and dematerialized so you can buy them offline if you are inclined to do so. This also means that a Demat account is not necessary to buy these bonds.
Which sections are these bonds tax free under?
Somebody wanted to know this last year, and I imagine that’s more for preparing for an exam of some sort rather than any real practical use, but anyway, the bonds are exempt under Section 10 (15)(iv)(h) of the Income Tax Act 1961.
Listing of the Bonds
Bonds will be listed within 15 days of closing of issue on both NSE and BSE, and there is no lock in on them so you can trade them in the secondary market immediately after listing.
Secured Issue
These are secured bonds which means that if REC goes insolvent, these bondholders will be paid before unsecured creditors. This doesn’t however guarantee full payment, and is no other form of guarantee either. In the past I’ve seen some people confusing a secured issue to mean something equal to a government guarantee that come what may, I will pay you money, and that’s not the case.
Who are Category IV Retail Investors?
There are four categories of investors for these bonds and the last category of investors which is the retain category get a slightly higher interest rate(half a percent). A retail investor is someone who invests less than Rs. 10 lakhs in these bonds.
Credit Ratings
This bond issue has got very high rating, and that’s not surprising given REC’s financial standing. They have been rated CRISIL AAA/Stable by CRISIL, CARE AAA by CARE, IND AAA by IRRPL and ICRA AAA by ICRA. These are the best credit ratings that these companies assign and denotes excellent credit standing per the credit rating companies.
When will interest be paid?
This information will be useful next year when people are looking for interest payments, and the interest on the REC tax free bonds will be paid once a year on December 1st.
Is there a step down feature?
A step down feature means that the rate of interest that you get if you buy the bonds from the stock exchange is lower than what you would get if you were the primary allottee when the company issued the bonds. It exists with this issue so you will get a lower rate compared with what you get if you subscribe to the issue now directly with the company. The lower rate is half a percent lower, which is basically the premium retail investors are getting.
How does this issue compare with listed bonds?
In terms of pricing, the quick check I did on the prices indicate that these bonds are better especially if you include the transaction cost, but I do need to dig deeper in this aspect and I’m sure a good discussion will ensue in the comments section so I will either update the post with that information or do a second new one.
What listing gains can I expect if I flip these bonds upon issue?
I have no idea.
Where can I get the REC bond application form?
You can get it at your local bank, and if you are going to apply online using ICICI Direct or Kotak or any other broker then they will have it. If you can’t find it and want one then here is a link to the bonds that AK Capital created for Shiv as sub broker, so the incentive charged will go to him. This doesn’t however mean you pay anything extra. For more info or to invest in Tax-Free bonds in Delhi/NCR, you can contact Shiv at +919811797407
Conclusion
I think tax free bonds are a good thing to have for most people in the 20% or 30% tax bracket, which ones doesn’t matter that much. They are all quite similar as far as ratings goes and interest rate goes. I would say that it is always better to buy them from two or three different issuers so in case something does go wrong, all your money is not invested with just one company.
Investors can check the allotment status of REC tax-free bonds from this link:
http://mis.karvycomputershare.com/ipo/
The bonds have got listed today on both the exchanges. They are trading around Rs. 992 to Rs. 995.
http://www.bseindia.com/stock-share-price/-/738rec27tf/961749/
Dear Shiv,
Any idea why in the demat account it shows as “Rural Electrification Corporation Limited 7.38 BD 18DC27 FVRS1000” = 18 December 2027 (15 year maturity) and Face value Rs 1000/- is ok but 7.38% interest for a retail investor (should be 7.8%) ?? Even other investors are complaining about the same thing. Probably while calculating the interest, they’ll check if the application was through IPO, then only give higher interest rate. Need to wait till next year to find out 🙂
Last years bond reads “Rural Electrification Corporation Limited SR-2 8.12/8.32 BD 27MR27 FVRS1000” What is BD btw?
Thanks,
Bhaskar.
Hi Bhaskar,
Please do not worry, you are absolutely bang on. 7.38% is the “base coupon rate”. Retail investors will get an additional interest rate of 0.50% p.a. till the time they hold on to these bonds till every “ex-interest date”.
BD stands for ‘Bond’, like NCD stands for Non-Convertible Debenture – “SHRIRAM TRANSPORT FINANCE COMPANY LIMITED 11.35 NCD 11JL14 FVRS1000”.
Dear Shiv,
Many thanks for the prompt reply !!
Best regards.
You are welcome Bhaskar !! 🙂
I got SMS today that the bonds have been credited to the demat account. This time it was pretty fast compared to last time.
Thanks Bhaskar for sharing this info !! This is really fast and I would say great work this time around. The companies are supposed to allot and list these bonds within 12 working days this year. It was just the 7th working day. I think the bonds will get listed on Monday.
Hi Manshu, How to subscribe to comments for a particular post without actually writing a comment? Something like ‘Watch for comments’. I just wanted to subscribe to comments on this page but could not do so without posting a comment.
At the end of 4th days after the issue opened, we have total subscription of Rs 1,160 crores appx with 90% of it coming from individuals. I believe plans to raise Rs 53,000 crores especially when the rates are going to fall will be a big flop. The institutions and banks who are entitled to about half the amount are not at all interested in such issues.
The 50 basis point difference in interest rates is a big deterrent for banks/ institutions for banks/ institutions. Same considerations will apply for all secondary market investors.
Your comments pl.
Government has once again shown their inability to manage their equities and debt issues.
I totally agree with you Mr. Arun. Institutional Investors & Corporates are not interested in these bonds this year. These issues are good for the Retail Investors in the 30.90% or 20.60% tax bracket, applying for less than Rs. 10 lakhs and holding them for medium-term to long-term.
Some of the features of tax-free bonds this year have made these issues unattractive for the Category I, II & III investors. Liquidity will also be lower with these issues this time in the secondary markets.
Probably with Inflation cooling down & RBI cutting rates, these bonds might get attractive 1-2 years down the line.
Hi Shiv,
Consider me an amateur. But i have a few queries.
1) If i do not have a demat account, how can i subscribe to this issue?
2) Their is a mention of the physical form, just want to practically understand as to how to avail of this?
Hi Shishir… If you do not have a demat account, you need to apply for these bonds in physical form. It is like you are investing in an FD, for which you will be getting a certificate.
You need to download an application form from the link pasted in the post, attach your PAN card copy, address proof copy and a cancelled cheque along with the duly filled application form and submit it at any of the nearest bidding centers of the syndicate members/trading members of NSE/BSE.
For any further assistance, you can contact me at +919811797407 or mail me at [email protected]
Thanks Shiv and Manshu.
Though I’ve already applied this time, maybe sometime in the future I’ll take the opportunity to repay even part of my gratitude.
Thanks Austere !! 🙂
I am already feeling so much honoured that it is difficult for me to even react.
Hi Manshu / Shiv,
I had been allotted 1,000 bonds of REC in it’s March 2012 issue. Period is 15 years carrying an interest of 8.12% (HNI category). It’s currently listing at a premium of 9%. Given that I am in the 20% tax bracket and that the sale of the REC bonds will mean profits earned will be added to my income, plus 0.5% brokerage charge, do you recommend I sell those and re-invest in this issue? (and thus replace myself in the Retail category).
Additionally, I had been allotted 336 bonds of PFC in it’s February 2012 issue. Period is 10 years carrying an interest of 8.2% (HNI category). It’s currently listing at a premium of 6%. Given that I am in the 20% tax bracket and that the sale of the PFC bonds will mean profits earned will be added to my income, plus 0.5% brokerage charge, do you recommend I sell those and re-invest in this issue? (and thus replace myself in the Retail category, plus net a 15 year bond instead of a 10 year bond).
I had invested in the earlier bonds with a view of keeping them till end of tenure and the same holds true this time as well. However, I don’t have enough funds to remain invested in all three issues and hence need to decide if I should shift which series I am invested in.
Thanks in advance.
Based on your situation I don’t see any value in selling and shifting to a lower interest bearing bond. If anything, the decline in interest rates will mean that the premium on your existing bonds go up even more.
I’d like to hear if anyone else thinks differently?
Hi Sanjay… If I were at your place, with funds limited for two investments only, I would have kept my investments in the old tax free bonds only. This is because of two reasons – first, if you sell your old bonds in the markets now, you’ll have to pay STCG tax on the capital gains made till date as per your income tax slab. Second, the market value for these new bonds would be as per the yield to maturity (YTM) for the new buyer and not as per 7.88% or 7.72%.
But, if you can manage to hold your old bonds for 2-4 months more till your investments complete one year and you also manage to buy and hold the new bonds till their maturity, then probably it makes sense to try replacing yourself in the Retail category. This would result in a YTM of 7.88% or 7.72% for you. Am I clear to you or was it too complicated?
Hi Shiv,
Yes, I can manage to subscribe to the new issue and hold on to the old bonds till they complete one year and then sell them so as to then pay LTCG tax instead of STCG tax.
I didn’t quite get the understanding around the second last sentence ‘This would result in a YTM of 7.88% or 7.72% for you.’ There was an Economic Times article titled ‘Why one should book profit in existing tax-free bonds and invest in new issues’ (http://articles.economictimes.indiatimes.com/2012-11-27/news/35385646_1_tax-free-bonds-nhai-bond-rec-bonds) and that too explained something around YTM but was unable to get the concept on why should I sell the old issues as compared to the new ones and hence the query arose.
Apologies, I am very new to this concept.
Yield to Maturity (or YTM) is the annualised rate of return that an investor earns on a fixed income instrument such as bond or debenture, if the investor purchases the bond today and holds it until maturity. YTM factors in the coupon rate as well the market value of the bond.
Say, if YTM on the old REC bonds is 7.49% at present and you sell these bonds today, the new buyer will earn 7.49% p.a. till maturity. So, if you intend to hold your fresh investment in REC bonds till maturity, then you will earn 7.88% p.a. which is equal to the coupon rate. If you pay Rs. 1,100 for this bond today for the same coupon and the same maturity period, then the YTM will be lower and if you pay Rs. 900, then the YTM will be higher. I hope this time it is clear to you.
No apologies acceptable, you are always welcome with your queries here!
Adding to Manshu/ Shiv’s response to Sanjay.
Though you intend to keep the bonds for 10-15 years till maturity is good, it is not practical. It is too long a period. There would always be investment opportunities where rotation of your savings would be advisable.
It is definitely practical and just depends on the mindset of the person. There are some people who hold stocks for 3 months then others who hold them for years together. If interest rates go down and you own a bond that pays a higher rate, why would you sell it?
Manshu = You might have refrained from your comments only if you had carefully read my comments especially the part which says, “There would always be investment opportunities where rotation of your savings would be advisable.” Fifteen years is too long a time to decide about future.
I have read your comment carefully Arun, just that I disagree that there will ‘always’ be a better opportunity in a 15 year timeframe. That’s all. I agree it is too long a time frame and that is precisely what makes it go both ways, you can’t say with certainty whether you will get such an opportunity or not.
Gold is one example of an asset that I had in mind where if people rotated out of it in the last few years they would have repented.
This is my situation – 30% tax-bracket, planning to invest 1 Lakh, and 80C fulfilled by Employee PF + Insurance.
Still I wonder if I should invest the 1L in PPF than this. PPF advantages –
Higher tax-free interest rate ( at least for this year. And even in another 2-3 years it will not come from 8.8% to 7.72%… it is a political decision)
No reinvestment risk.
What do you think?
Hi Mr. Ashok… I totally agree with you, not sure about others. The only thing is that PPF does not have any scope of capital appreciation but I would still prefer to invest in PPF first and then in these tax free bonds.
I appreciate the pleasure people get in advising. Really appreciate the selfless effort taken to educate investors !!
Hi, I would like to buy this one and all the future tax free bonds from Shiv as a small token of appreciation of the great work he is doing here. Any idea how to go about it. I am based out of Bangalore and used the Sharekhan online IPO application process last year.
Thank you so much anon.coder for your recognition and kind words !!
Though you might find the process a little difficult, I’ll definitely share with you all the options to invest through me sitting there in Bangalore.
1. Use the link pasted above to get the application form, duly fill it and submit it directly with the bidding centers of the syndicate members/trading members of NSE/BSE.
2. Use the link pasted above to get the application form, duly fill it and send it to me. I’ll do rest of the work. http://www.investitude.co.in/contact-us.php?p_id=82
3. Open an online FundsIndia account with me to invest in all these tax free bonds online, in a manner you did it with Sharekhan. You can also invest in various other products such as NCDs, IPOs, Mutual Funds, ETFs, Company Deposits etc. through this account. This account is free for lifetime. You just need to provide me your email id, contact no. and name as per your PAN card.
4. Open an Edelweiss Demat and Trading account with me for future investments. FYI, I am an Authorised Person with Edelweiss Broking.
Your kind words are good enough for me as appreciation for my work. After these words, it is perfectly fine with me even if we are not able to get associated for investments. 🙂
This is an awesome gesture. Thanks!
Are these going to be alloted first-come first-serve?
Hi VikasG… yes, the allotment will be done on a first-come first-serve basis.
This is an interesting thing because on one hand you don’t want to get your money stuck and not get anything out of it but on the other there are going to be more issues in the future so no need to rush as well.
So, good reasons to rush as well as wait.
The successful allottees will get interest on the application money at the same rate of interest as the coupon rate is. I think, if the RBI cuts interest rate in its December policy, then the upcoming issues will carry a lower rate of interest.
But, if it doesn’t, then the future issues will have similar rate of interest or probably a bit higher.
A nice post by Business Line – http://www.thehindubusinessline.com/features/investment-world/hightax-bracket-investors-should-go-for-rec-bonds/article4154067.ece?homepage=true&ref=wl_home
Should you wait?
No. There is a good possibility that the Reserve Bank of India, to prop up economic growth, may cut interest rates in the near future. This could result in government bond yields declining and forthcoming tax-free issues offering lower returns than REC. So, investors may be better off locking into this issue.
Thanks Shiv, I think this merits a small post on the subject.
The draft prospectus says that issue will close as soon the quota (Rs 1,800 crores) and total subscription (Rs 4,500 crores) is reached. But it will kept open for 3 days minimum. You can possibly check about the daily status of subscription from BSE/ NSE websites. I am not sure if they will give this data like they do for shares IPOs. But one can try.
Thanks Mr. Arun for this info! The bidding procedure for these bonds is the same as it is for the shares IPOs. Bid timings would be 10 a.m. to 5 p.m. Please check this link also – http://www.onemint.com/2012/09/10/now-get-live-subscription-numbers-for-ipos-of-ncds-and-tax-free-bonds/
Hi Manshu… REC can retain oversubscription upto Rs. 4,500 crore. So, if this amount gets exhausted in this issue itself, then there will not be any issue from REC going forward.
Thanks Shiv.
Thanks Shiv.