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]
With the current financial year coming closer to an end, the investors, waiting to deploy their cash surplus or maturity proceeds from their other investments into tax free bonds, are currently spoilt for choice. There are as many as five tax free bond issues currently open and the much awaited NHB issue is getting open for subscription tomorrow i.e. March 7.
As expected, it is carrying the highest rate of interest among the ‘AAA’ rated issues which are currently open – 8.93% p.a. for 15 years, 8.90% p.a. for 20 years and 8.50% p.a. for 10 years.
Size & Closing Date of the Issue – NHB’s first issue in December was of Rs. 2,100 crore and it got subscription to the tune of Rs. 4,366.43 crore on the first day itself. Though the current issue is scheduled to close on March 18, going by the issue size of Rs. 1,000 crore, I think it too should get oversubscribed on the first day itself.
So, in order to avoid rejection of their applications, I would advise the interested investors to apply for these NHB bonds on the first day itself. In case of oversubscription on the first day, the applicants will get allotment on a pro rata basis.
NRI/Foreign Portfolio Investment – Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue.
Investor Categories & Allocation Ratio – Once again 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) – 10% of the issue i.e. Rs. 100 crore is reserved
Category II – Non-Institutional Investors (NIIs) – 25% of the issue i.e. Rs. 250 crore is reserved
Category III – High Net Worth Individuals including HUFs – 25% of the issue i.e. Rs. 250 crore is reserved
Category IV – Resident Indian Individuals including HUFs – 40% of the issue i.e. Rs. 400 crore is reserved
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. As mentioned above, allotment will be made on a pro rata basis for that day on which the concerned category gets oversubscribed.
Rating of the Issue – Investors seeking safety of their capital give high importance to the credit rating of an issue. This issue has been rated ‘AAA’ by CRISIL, ICRA and CARE. Instruments with ‘AAA’ rating are considered to have highest degree of safety regarding timely servicing of financial obligations.
Lock-in Period & Premature Redemption – There is no lock-in period with these bonds, but at the same time, you cannot redeem these bonds back to the company before their maturity period gets over. In order to encash your investment before maturity, you’ll have to compulsorily sell these bonds on the National Stock Exchange (NSE) where these bonds will get listed for trading.
Demat/Physical Option – Though it is mandatory to have a demat account to sell/trade these bonds, you can subscribe to them in physical/certificate form as well. Interest payment will still get credited to your bank account through ECS.
Interest on Application Money & Refund – As always, NHB will pay interest to the successful allottees on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment, at the applicable coupon rates. Unsuccessful allottees will get interest @ 5% per annum on their refund money.
Minimum Investment – As NHB has kept the face value of its bonds unchanged at Rs. 5,000, an investor is required to apply at least one bond in this issue i.e. minimum investment of Rs. 5,000.
Interest Payment Date – NHB has not fixed its interest payment date this time as well and its first due interest will be paid exactly one year after the deemed date of allotment.
Which issue should I invest in?
When I covered NHB’s first issue in December, I mentioned certain points to express my views. Let me mention those points again and express my current views regarding those points:
First, NHB issue is ‘AAA’ rated.
Current View: There is no change in NHB’s credit rating for this issue as well. So, I think it remains a good issue to invest rating wise.
Second, you are going to get 9.01% p.a. and 8.88% p.a. coupon rates which are the best 20-year and 15-year rates offered by any AAA rated or AA+ rated issuer till date.
Current View: NHB offered 9.01% p.a., 8.88% p.a. and 8.51% p.a. for the 20-year, 15-year and 10-year options respectively. These respective rates stand as 8.90% p.a., 8.93% p.a. and 8.50% p.a. this time around, which makes the 15-year option to be the most attractive for a retail investor.
Third, NHB is a wholly-owned subsidiary of the RBI and I don’t foresee the RBI to ever let its subsidiary default on any such bond issue. Also, NHB is the regulator of the housing finance companies, like RBI is for the banks and SEBI is for the capital markets. I don’t think any government would allow any regulator to default on its payments.
Current View: I think there is no need to change my earlier view as far as this point is concerned.
Fourth, it is almost certain that the CPI inflation will start falling from next month onwards. If that materialises, we might have G-Sec yields falling quite sharply.
Current View: Though there has been a sharp fall in the CPI as well as the WPI inflation January onwards, but unfortunately, G-Sec yields have not fallen in line with the inflation numbers. There have been many factors behind it – high fiscal deficit, high debt levels of the government, unexpected Repo Rate hike & start of inflation targeting by the RBI in its January policy, uncertain political & economic policy environment in the short term and the government’s unrealistic fiscal deficit target for the next fiscal year.
I think the G-Sec yields should move in a broad range till the time we have a stable government at the centre. If we have a sharp fall in the inflation numbers and controlled government expenditure in the next few months, we can expect G-Sec yield to fall sharply if we get a strong and stable government in May.
Fifth, IRFC is the next company to launch its tax-free bonds from January 6 and its coupon rates are lower than that of NHB at 8.48% p.a. for 10 years and 8.65% p.a. for 15 years. It is not going to issue these bonds for 20 years either.
Current View: There are five issues currently open, out of which three issues are ‘AAA’ rated, one is ‘AA+’ and one is ‘AA’ rated. As this ‘AAA’ rated NHB issue is offering the highest rate of return as compared to the other ‘AAA’ rated issues, I expect a very good response from the institutional as well as the retail investors.
Sixth, there are very few good companies left now to issue tax-free bonds this financial year. REC, PFC, NHPC and NTPC have already raised their quota of authorised amount from the markets. HUDCO is also very close to reach its targeted amount. Only IIFCL, NHAI, IREDA, Airport Authority of India (AAI), Ennore Port and Cochin Ship Yard are now left to issue these bonds and their issue sizes are also very small, except NHAI and IIFCL.
Current View: IRFC today extended the closing date of its current issue from March 7th to March 14th. Also, as AAI issue is not expected in the current financial year and Cochin Ship Yard is yet to file the prospectus for its issue, I think this NHB issue should be the last public issue of the current financial year.
Seventh, it is still not certain whether tax-free bonds would see the light of the day next financial year onwards or not. Like 80CCF infrastructure bonds got stopped getting issued from FY 2012-13 onwards, it is possible that the next government decides to stop extending this budgetary support to all such companies.
Current View: I think there is no need to change this view as well. You might not have tax free bonds available for subscription next financial year, in which case you will see a good demand for these bonds in the secondary markets.
Eighth, NTPC issue got listed a few days back and that too at a premium. If an issue with coupon rates lower than the NHB issue can trade at a premium, then it is almost certain that these NHB bonds would also trade at a premium on listing.
Current View: It has been the case with most of these issues in the current financial year. Most of these bonds have been trading at a premium and I expect NHB bonds also to list at a premium in the current interest rate scenario.
Ninth, NHB has reasonably strong fundamentals. It reported profit after tax (PAT) of Rs. 450 crore with total income of Rs. 3,030 crore for the period ended June 30, 2013 as against Rs. 387 crore and Rs. 2,492 crore respectively for the period ended June 30, 2012. Its net interest margin (NIM) also improved to 2.25% during this period as against 2.20% last year.
NHB’s asset quality has also been remarkable. Gross NPAs and Net NPAs remained quite close to zero for the periods ended June 30, 2011 and June 30, 2012. Though its gross NPAs and Net NPAs have jumped to 0.53% and 0.45% respectively in the latest period ending June 30, 2013, this relative poor performance was due to one large project exposure slipping into the NPA category. This large account was worth Rs. 179.60 crore out of its total NPAs of Rs. 180.62 crore.
Current View: There is no change in my view as far as NHB’s fundamentals are concerned.
Why you should not invest in this issue?
If I myself decide not to invest in this issue, I would have only one valid reason for that, higher expected coupon rates in the forthcoming issues. If any of you think that the rates would be higher with NHAI bonds or IIFCL tranche III bonds, then you can probably skip this issue. Personally, I would invest my family’s money in this issue and would also advise my clients to do that.
Current View: Last time I had only one reason. This time I don’t have any reason for me not to invest in this issue, except that I don’t have enough money for me to fully utilise Rs. 10 lakh limit applicable for a retail investor.
Application Form of NHB 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 NHB tax-free bonds, you can contact me at +919811797407
Hi Shiv,
If a company buys TFBs from secondary market, will it get the higher coupon rate which was reserved for retail investors?
Thanks
Hi AB,
The company will get a lower rate of interest as the Registrar will pay interest based on the investors’ PAN details.
I wantd to know if there is any good tax free bonds that i can invest into now. i hv never invested in TFB before.
Hi Ankur,
You can consider IRFC or REC tax free bonds. Both these issues are offering 8.88% interest for 15 years.
http://www.onemint.com/2014/02/27/8-88-irfc-vs-8-88-rec-tax-free-bonds-february-2014/
Day 3 (March 11) Subscription Figures:
Category I – Rs. 195 crore as against Rs. 100 crore reserved
Category II – Rs. 391.81 crore as against Rs. 250 crore reserved
Category III – Rs. 247.66 crore as against Rs. 250 crore reserved
Category IV – Rs. 481.94 crore as against Rs. 400 crore reserved
Total Subscription – Rs. 1,316.41 crore as against total issue size of Rs. 1,000 crore
The issue stands closed today. Undersubscription of Rs. 2.34 crore in Category III will get allotted to Category IV investors.
Dear Shiv, Great work.
I have one query. I had applied for Tranche-I in Physical mode. I have got the Allotment Letter quite some time back, but Certificates have not arrived yet. Can you please provide some input and help me? Thanks.
Thanks Anjan!
I think you should contact the Registrar (Karvy Computershare) to inquire about the same. Contact details of Karvy will be there in the allotment advice. I think they will be able to help you in this matter.
Thankd shiv.
You are welcome KS!
Day 2 (March 10th) Subscription Figures:
Category I – Rs. 195 crore as against Rs. 100 crore reserved
Category II – Rs. 391.81 crore as against Rs. 250 crore reserved
Category III – Rs. 243.89 crore as against Rs. 250 crore reserved
Category IV – Rs. 469.48 crore as against Rs. 400 crore reserved
Total Subscription – Rs. 1,300.18 crore as against total issue size of Rs. 1,000 crore
Shiv
It looks like this is missed opportunity for me. If I subscribe IRFC, any chance of allottment there?
Thanks
Yes, you’ll get 100% allotment with IRFC, IIFCL and REC issues.
Dear Shiv,
I m keen follower of your posts on onemint.
I have two questions pertaining to Tax Free bonds
1) How are TFBs better than 5 year FMPs. Please consider following
5 Yr FMP is on offer from Stable/reputed MF house. FMP is having strong Portfolio. My Investment horizon is 5 years.
2) There are some issues of TFBs, where NRIs can invest.
If at all NRI is not in india currently, but has given POA to his father, can father sign the form and invest on NRI’s behalf? The investment should be in NRIs name.
The payment can be made from NRO acct of NRI where-in father is mandate holder in the acct or
can father give cheque from his own savings acct from the funds sent by his NRI son
Thanks
Vijesh
Hi Vijesh, I am glad that you follow OneMint regularly !!
1. I think FMPs are great when an investor has a shorter investment horizon than 10/15/20 years, when FMPs provide double indexation benefit, when the investor doesn’t have any liquidity requirements for this investment period and also when the interest rates are ruling higher. The month of March is a great time to invest in FMPs to get double indexation benefit.
Personally, I prefer tax free bonds as they offer reasonable liquidity and scope of capital appreciation. I think interest rates should fall with a stable & strong government at the centre. Also, FMPs invest in securities like these tax free bonds and other corporate debt instruments like NCDs. Why not to invest in bonds/NCDs directly?
2. I am not sure what is the exact procedure for an NRI investment in such a situation. You can mail me your query in detail and let me check if I can help you in this matter.
Thanks a lot Shiv
You are welcome!
Hi
Have one doubt. A local cooperative bank is offering 9.25 on FD which they claim is tax-free for members. I am not sure whats the rules on FD interest taxation for cooperatives. Reason am asking is wouldnt this be a better option than tax-free bonds interest wise if you ignore the lock-in. Seek your advise. Thanks
Co-ooperative bank FD interest is fully taxable. Only difference is they are not subject to TDS. Co-operative banks are always more risky than AAA rated tax free bonds or scheduled bank fixed deposits. 9.25% is not a tempting offer either. For debt , i would prefer low risk high return avenues like tax free bonds only. If someone would like to take high risk , better to invest in equity which offers higher risk reward ratio
Regards
Ramadas
Sorry when u say taxable. Taxable in what sense? If no TDS whats the tax? Thanks
Hi Harineem,
Bank/corporate fixed deposits are always taxable. An investor is required to pay tax on its interest income as per his/her tax slab. I think these deposits are liable to TDS as well. I don’t know how they are claiming it to be tax-free. Is it some kind of charitable organisation or they have some special provision under which the interest income is tax-free ??
Co-operative banks do not deduct TDS for sure. Even charitable institutions does not have any provision to offer tax free interest. Charitable institutions at best help claim tax deduction on donations given. Looks like mis-selling from the part of co-operative bank
TDS is tax deducted at source which is 10% when you have PAN. You are supposed to add interest income with your total income and pay tax accordingly. TDS covers only part of the tax unless you are in 10% tax bracket. Looks like co-operative bank officials is using no TDS provision to tell it is tax free.
Regards
Ramadas
Hi Ramadas,
Though I am not 100% sure, but I think co-operative banks do deduct TDS. Please check – http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8620&Mode=0
Interesting. I didnt know they deduct TDS. Then i have no idea how cop-operative bank can claim no tax. Thanks shiv for the data.
Regards
Ramadas
Thanks Ramadas!
Shiv, Cat 3 has no application today!! I guess one more day to go and that small gap may be then given to the Cat 4 which means 100% allotment possibility – keeping fingers crossed 🙂 What do you think?
Rs. 8.82 crore additional investment in Category III today. Either no or very small portion of Category III would get allotted to Category IV.
Hi Shiv
I am not sure if this time also people will get close to 100% allotment. Definetly better than last issue for sure. I feel NHB allotment will be complicated this time especially for those who applied for more than 1Lakh. Technically , 93% allotment is feasible. Note that NHB has a bond value of 5000. Mostly likely people who have applied upto 50000 will get full allotment. For those applied above that 85%-90% is what i feel allotment will be. I am expecting 10% refund from NHB. Let me know if you have different view
Regards
Ramadas
Hi Ramadas,
I agree with most of your points and I think a minimum of 95% allotment will be made to each applicant after technical rejections.
Shiv, what does technical rejection imply?
By the way your articles and advice is very timely and helpful. keep up your good work.
Some kind of discrepancy in the application form or mismatch between the bidding info and application info/supporting documents fall under technical rejections.
Also, thanks a lot for your encouraging words !!
NHB has decided to close this issue tomorrow i.e. on tuesday, March 11th.
http://epaper.financialexpress.com/240639/Indian-Express/10-March-2014#page/5/2
My bad shubh,,i followed the link pasted above which still gives 2.67 (For base issue size of rs 250 cr).
Shiv is correct.. the retail category is just about oversubscribed
http://www.bseindia.com/markets/publicIssues/EODCumlativeShedule.aspx?ID=784
retail (cat 4) is oversubscribed 2.67 times. Do not try to Subscribe for the bonds any more .In case you have already subscribed and have cash in hand might make sense to apply for the rec/ irfc bonds based on the part refund expected from nhb
I understand from Mr Shiv’s subscription figure that, the Category IV (Retail) is oversubscribed by 1.08 times. (430.34/400).
How you arrived the figure of “2.67 times”?
Shiv, I have applied for this issue for 20 years today, looks like will get ‘almost’ 100% allotment (around 95% maybe).
Now if I apply again for 15 years tomorrow day2 (the sum of both subscription is below the cap on retail investment I.e 10 lakhs).
How will the allotment happen Tomm?
Chances of allotment against Monday’s application are very very bleak.
And also IIHFL bonds will be open for subscription on 12March…can you pls also evaluate that issue…thank u
I’ve already started working on that. I’ll try to complete it by tomorrow.
Hi Shiv,
I would really appreciate if you could include a few lines on comparison with IRFC and REC – the other bonds which people can subscribe to currently.
Regards,
Deepak
Hi Deepak,
Here you have the link to their comparison:
http://www.onemint.com/2014/02/27/8-88-irfc-vs-8-88-rec-tax-free-bonds-february-2014/
IIHFL monthly 11.52% Secured Redeemable NCD can buy @ 970
i.e 3% discount on market & this one coming out Un-Secured ??
mr shiv , pl. cover this point if possible ..
Shiv can you pls elaborate the taxation of income received from these bonds….and also is it worth to subscribe these bonds those who falls under 10% bracket
Hi Namdev,
Interest income earned on these bonds is tax free, which is why these bonds are called tax-free bonds. Long term capital gain (LTCG) is taxed at 10% and short term capital gain (STCG) is taxed as per the tax slab of the investor.
If an investor, in the 10% tax bracket, can earn more than 10% elsewhere with this kind of safety & flexibility, only then these bonds are not worth it for investment. However, I find these bonds to be quite attractive for a retail investor.
Hardly it matters since all retail investors will get 93-95% allotment.
Day 1 (March 7th) Subscription Figures:
Category I – Rs. 195 crore as against Rs. 100 crore reserved
Category II – Rs. 391.59 crore as against Rs. 250 crore reserved
Category III – Rs. 235.07 crore as against Rs. 250 crore reserved
Category IV – Rs. 430.34 crore as against Rs. 400 crore reserved
Total Subscription – Rs. 1,252 crore as against total issue size of Rs. 1,000 crore
So technically they should close the issue tomorrow. What about Cat 3 under subscription will that differential given to Cat 4 or will they take whatever comes tomorrow in Cat 3 and fill it out?
The issue is yet to get closed officially. Such oversubscribed issues did not get closed even on the 2nd day in the past. Normally, these companies close such issues on the 3rd day. I think this issue will remain open at least till Monday on which the category III will definitely get subscribed. So, no scope of category IV getting any cut from category III reserved portion.
Thanks Shiv. You are always prompt with your responses!
Thanks Mr. Subbu for these kind words! 🙂
Thanks sir for the info on NHB bonds. The info on this issue was not available in any sites that I visit or in newspapers. It is because of you that I have applied and hope to get some bonds 🙂
You are welcome Pradeep!
what is the overall subscription ? i mean in each category