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]
After a month long break, tax free bond issues are back and the 10-year options are looking much healthier now carrying annual coupon rates of 8.76% and 8.66% for ‘AA+’ rated HUDCO issue and ‘AAA’ rated NTPC issue respectively, as against its previous highs of 8.43% for ‘AAA’ rated PFC & NHPC issues and 8.39% for ‘AA+’ rated HUDCO issue.
While this jump has come due to a consistent rise in the yield of the benchmark 7.16% 10-year government bond, the coupon rates with 15-year option and 20-year option have been the highest ever with the HUDCO issue as it is rated ‘AA+’ and carries a leverage of 10 basis points (or 0.10% per annum). I’ll cover the HUDCO issue today and the NTPC issue tomorrow.
HUDCO is launching the second tranche of its tax free bonds from Monday, December 2nd and it will be the first ever tax free bond issue to cross the psychological mark of 9% coupon rate.
Size of the Issue – HUDCO has set the base issue size at Rs. 500 crore with an option to retain oversubscription up to Rs. 2,439.20 crore. The company has already raised Rs. 2,560.80 crore in its first tranche and through a private placement. I think this issue is attractive enough for it to become the last issue from HUDCO’s stable.
Rating of the Issue – Like Tranche I, this issue has also been rated ‘AA+’. CARE and India Ratings are the two companies which have passed their opinion to assign this rating to the current issue.
Again, the bonds are ‘Secured’ in nature as certain receivables of the company will be charged to the extent of amount to be mobilized under the issue. Also, as HUDCO is wholly-owned by the government of India, I would consider the investors’ investments to be comfortably safe in the issue.
OK to NRI Investment – Non-Resident Indians (NRIs) are eligible to invest in this issue, on a repatriation basis as well as on non-repatriation basis. Qualified Foreign Investors (QFIs) are also eligible.
Investor Categories & Allocation Ratio – As always, the investors have been classified in the following four categories and each category will have certain percentage of the issue size reserved for the allocation:
Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved
Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved
Category III – High Net Worth Individuals including HUFs, NRIs & QFIs – 30% of the issue is reserved
Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue is reserved
First Come First Served Allotment – 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 – Bombay Stock Exchange (BSE) is the only exchange on which these bonds will get listed and the exchange has given its in-principle listing approval to the bonds issued under this tranche. As with all the recent issues, these bonds also will get allotted and listed within 12 working days from the closing date of the issue.
Demat/Physical Option – Investors can apply for these bonds either in physical form or in demat form, as per their comfort and requirement.
No Lock-In Period – These bonds are offering good rate of interest which is tax-free also under Indian taxation laws. As your investment does not provide any tax deduction, there isn’t any lock-in period with these bonds. As these bonds get listed on the BSE, you may sell them whenever you want at the market price.
Interest on Application Money & Refund – HUDCO is the only company which pays the same rate of interest as the applicable coupon rate is on the application money as well as on the money due for a refund. So, with the 20-year option, you’ll get 9.01% as the rate of interest on your application money as well as the refund amount.
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 Rs. 1,000 face value each. Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.
Interest Payment Date – HUDCO has not announced the interest payment date of this issue as yet. I will update this post as and when it gets announced at the time of listing.
While it will be a bonanza for the fixed income investors, I’ll consider this to be a bad situation for the commercial banks, the government and the borrowers. Let’s check how.
Many people have been breaking their fixed deposits to invest in these tax free bonds. It is putting a lot of pressure on the banks to either hike their deposit rates or increase premature withdrawal charges.
As the money is moving out of taxable instruments like fixed deposits, post office schemes etc., the government is also losing out a big amount in tax revenues.
Higher rate of interest will force banks to hike their lending rates also in order to maintain their net interest margins (NIMs) and this outcome will put an additional burden on the borrowers.
With a huge difference between the 10-year interest rate and the 20-year or 15-year rates, I used to prefer the 20-year or 15-year options earlier. But, as the difference has narrowed down considerably, the 10-year option has also become quite attractive now. However, I still prefer the longer duration options as I think it is better to stay invested with longer duration bonds when the interest rates get higher.
Though the issue is scheduled to get closed on January 10, 2014, I really doubt that it would continue that long. I expect it to get closed earlier than that given other companies don’t offer a similar or higher rate of interest.
With coupon rate crossing 9% now on these tax free bonds, there is no reason for the investors to ignore such high rate of interest and keep investing their fresh money into fixed deposits or keep their money invested in it.
Application Form of HUDCO Tax Free Bonds
HUDCO Tax-Free Bonds – Bidding Centres
HUDCO Tax Free Bonds – Banking Matrix
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
Dear Mr Shiv
If aperson does not need regular income and is in the highest tax bracket, does it make sense to invest in these bonds. Or else if a person decides to go for the bonds , where does he invest the annual interest so as to retain the benefit of no taxation.
would debt mutual funds be the right scheme to invest the annual interest received?
Dear NKN,
You can invest the interest amount in PPF, debt mutual funds, tax-free bonds or any other instrument which offers you a good investment opportunity.
Hi Shiv,
Are there any more TF bonds expected in December, other than IIFCL?
Thanks in advance…
Hi Deepak,
I am expecting IRFC, NHB & NHAI issues to get launched during December.
Hi Shiv – Are you going to do a writeup on IIFCL bond issue ?
Since there are number of Adityas 🙂 , posting with full name
Hi Aditya,
I’ll cover it in a day or two.
Day 4 (December 5) subscription figures:
Category I – Rs. 12.03 crore as against Rs. 243.92 crore reserved
Category II – Rs. 268.18 crore as against Rs. 487.84 crore reserved
Category III – Rs. 321.01 crore as against Rs. 731.76 crore reserved
Category IV – Rs. 647.41 crore as against Rs. 975.68 crore reserved
Total Subscription – Rs. 1,248.63 crore as against total issue size of Rs. 2,439.20 crore
Hi Shiv,
I have heard from people that one shoould invest in Bonds only with a sizeable investment amount like 4-5 Lakhs. Is it correct?
How much sense does it make for a small investor with investment amount of say 15000-20000 to invest in Bonds like HUDCO or NTPC? Would it be better to invest in Power Grid FPO with this much of investment amount?
This is kind of dilemma which I am sure many small investors with limited investable amount face always. Since for small investors its always a either-or situation between various investment options.
your take on this please.
Thanks,
Pratyush
Hi,
While Shiv is responding, I would like to add some perspectives of Tax free bond. It depends on the purpose of investment. Long term gain, short term gain, regular income etc. Which tax bracket the investor is in. It makes sense for someone in 20% or 30% tax brackets to chose the Tax free bonds, since return is better considering the return from other investments after the deduction of tax. If one is looking for investing 10-50 K and planning to sell on appreciation , the gain is not so high and it will be better to look at equity market. If there is a chance to save on tax from interest income, Tax free bond is better.
Thanks George for your valuable inputs !! Your thoughts are very clear.
Hi Pratyush,
I am not sure how to answer this question. I think for a small investor, small investment of Rs. 15,000-20,000 is a big investment. To me, the amount of investment doesn’t matter. What matters is the purpose of investment, how much after-tax return I earn from my investment(s) and how favourable is the risk-return ratio.
With tax-free bonds, there are a lot of things which attract me – tax-free fixed returns, PSUs issuing these bonds, scope of capital appreciation, easy liquidity etc.
For higher returns, I always advise equity investments. But, then equity investments are riskier and there is no free lunch in the equity markets. Power Grid FPO is attractively valued. It was attractive in November 2010 as well. But, since then, in 3 years’ time, it has given very poor returns. So, you need to consider all these things while investing.
If Rs. 15,000-20,000 is a big investment for you and you don’t want to lose this money, then equity investment is not for you. Though I expect Power Grid to give 30-50% returns in the next 1-2 years time. I also expect equity markets to give good returns in the next 1-3 years time frame.
Please notify me of follow up
Day 3 (December 4) subscription figures:
Category I – Rs. 12.03 crore as against Rs. 243.92 crore reserved
Category II – Rs. 229.39 crore as against Rs. 487.84 crore reserved
Category III – Rs. 291.65 crore as against Rs. 731.76 crore reserved
Category IV – Rs. 488.61 crore as against Rs. 975.68 crore reserved
Total Subscription – Rs. 1,021.68 crore as against total issue size of Rs. 2,439.20 crore
Can a retail investor invest Rs. 10 lakhs, or does it have to be less than that (i.e. 9.99 lakhs)?
Yes Deepak, a retail investor can invest Rs. 10 lakhs in a single issue and get higher interest. It is Rs. 10 lakhs or less. The category will change above Rs. 10 lakh investment.
Hi Shiv,
I applied for HUDCO bonds today for some portion of my investment. Just wanted to double-check that i will get full allotment right ?
The issue seems to be losing steam !!
Yes Aditya, you’ll get full allotment in HUDCO bonds if the investment is made today.
Thanks for replying. The interest on these bonds is paid on a monthly/quarterly/half yearly/yearly basis?
And do we have bonds where the interest also gets compounded with the principal?
You are welcome!
1. The interest gets paid annually on a fixed date.
2. No tax free bond issue offers interest to be compounded.
Day 2 (December 3) subscription figures:
Category I – Rs. 2 crore as against Rs. 243.92 crore reserved
Category II – Rs. 184.09 crore as against Rs. 487.84 crore reserved
Category III – Rs. 229.38 crore as against Rs. 731.76 crore reserved
Category IV – Rs. 311.63 crore as against Rs. 975.68 crore reserved
Total Subscription – Rs. 727.10 crore as against total issue size of Rs. 2,439.20 crore
Hi Shiv,
Can you please shed some light on how these bonds and their rates move with passing time.
For Eg i have bonds worth 5 lac and want to sell bonds worth 1 lac every year. Does the interest accumulate and is paid at the end of the tenure or it reflects in the value of the bonds after the interest payment date and the bonds can be sold at that rate.
Lastly are there any previously issued bonds which are available at discounted rates and can give good returns over a few years.
Hi,
With tax-free bonds, interest amount gets annually paid on the interest payment date and credited into your bank account, after which their market price becomes “Ex-Interest”. In between two “ex-interest dates”, the interest amount gets accrued and gets reflected in the market price of the bonds.
As far as I know, the coupon rates the current bonds are offering are the highest. These are higher than the YTMs last years’ bonds are trading at. So, it is better to subscribe to the current year’s bonds.
Hi,
Is there a call/put option for this HUDCO series bonds? Also, is it possible to pls clarify if there are other “guaranteed” (or relatively safer) investment options for NRI investors without market risk – other than Bank FD’s, NCDs and tax free bonds – in repatriation mode? I know of NSC’s but there are not repatriable and company FD’s would not fit the above criteria. Pls advise.
Hi,
There is no call/put option with these bonds. Also, there aren’t many fixed income instruments which offer high guaranteed returns without market risk. Even tax-free bonds carry market risk & interest rate risk, if you want to cash out sometime before maturity.
Day 1 (December 2) subscription figures:
Category I – Rs. 2 crore as against Rs. 243.92 crore reserved
Category II – Rs. 163.85 crore as against Rs. 487.84 crore reserved
Category III – Rs. 165.27 crore as against Rs. 731.76 crore reserved
Category IV – Rs. 167.46 crore as against Rs. 975.68 crore reserved
Total Subscription – Rs. 498.58 crore as against total issue size of Rs. 2,439.20 crore
Hi Shiv,
What do you make of these subscription figures ? Only 2 crores in Cat 1 and about 15-16% subscription in Cat 4 !!
I would call it a wait & watch stance by the Category I investors as they are the smartest investors, whereas Category IV investors’ response always remain like that. Even with the NHPC issue, it was only Rs. 171.82 crore on the first day.
Hi,
I have already invested 10 lac in Hudco in Sep-2013. If I invest another 10 lac, do I get the interest rate for category 4 ? I guess their document says if the investment is over 10 lac across all series then the category will change to HNI. Please clarify this?
Already replied.
Hi,
I have already invested 10 lac in Hudco in Sep-2013. If I invest another 10 lac, do I get the interest rate for category 4 ? I guess their document says if the investment is over 10 lac across all series then the category will change to HNI. Please clarify this?
Hi Hemant,
Even if you invest Rs. 10 lac in this issue as well, you’ll get the higher rate of interest. The investment should not exceed Rs. 10 lac across all ‘Series’ of the same issue, but it can exceed Rs. 10 lac across different issues or different tranches.
Thanks for the reply.
Thanks for the clarification.
You are welcome!
Can you give the info on interest dates for ALL the tax free bonds in the last 2 months?
I’ll do a post on the same very soon.
Excellent analysis as always!
it is great that NRIs can also subscribe to this issue.
I wonder why would they? They keep their surplus funds in NRE accounts which gives them more than 9.5% tax free in India. Why would they try to earn only 9% tax free here.
I also understand that NRIs in USA have to pay taxes on their global income. both interest income in NRE accounts and in tax free bonds though tax free in India is taxable In USA. This is a gray area.
Do you have any references for taxation in USA For parents who got recently migrated, obtained a GC, have nil income in USA, but are paying taxes in India for their pensions, interest incomes etc. I also presume that dividends in India, and profit from sale of mutual funds are also treated differently in USA. if you have done any blog on the subject or planning to take up this topic, that would be great. there must be some tax consultants who specialize in filing taxes in USA for such NRIs to avoid double taxation. Actually if you are not earning in USA and are paying taxes in India regularly, you should be OK. But they want us to file return in USA also from the date we become permanent residents there. this is a daunting task for elderly.
Thanks Mr. Ramesh for your kind words !!
Yes, you are right that NRE deposits are also tax free and they are also giving good returns. But, I think it is a short term measure by the Indian government to keep them tax free in order to boost dollar inflows and keep the value of Indian Rupee somewhat stronger.
As these bonds are tax-free right from the beginning, they will remain tax free throughout this long tenors.
Also, I am not sure whether Manshu has done any post on NRI taxation or not, I’ll ask him to cover it, if possible. Personally, I handle these issues for my NRI clients.
Hi Shiv – Sorry this might be a silly question , but what is the probability of getting full allotment in both cases if online application is made on the 2nd-3rd day of the issue ?
Hi Aditya,
I cannot be 100% sure about it. But, I think you should easily get full allotment with both the issues on the 2nd/3rd day of your bidding. I think there will be a better demand for the NTPC issue as the issue size is smaller as compared to the HUDCO issue, it is ‘AAA’ rated and the company is fundamentally better. It is better to bid for the NTPC issue first. If you want to ensure full allotment on the 2nd/3rd day of your bidding, just let me know.
Hi Shiv!
This issue is rated AA & NTPC is rated AAA. What difference do you expect in the price of these 2 bonds post listing?
Will the 10bps higher interest rate being offered by HUDCO get evened out by its lower listing price compared to NTPC because the former is AA & the latter is AAA? For someone looking to hold these bonds till term, there is no difference since they are both secured. But I am asking from the perspective of short term traders
In general, what is the price difference, post listing (if any), between AA & AAA? Could you please elaborate the same with some examples?
Hi Simple,
HUDCO issue is ‘AA+’ rated and NTPC issue is ‘AAA’ rated. I think both issues are equally good for the long term. It is difficult to conclude which issue stands superior. I think NTPC issue is slightly better for listing gains. I’ll try to compare both these issues soon.