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]
First of all, we wish all the readers of OneMint a very Happy & Prosperous New Year !! May God give you success in your work and peace in your life and 2016 turns out to be the best year in your life !!! 🙂
IREDA 7.74% Tax-Free Bonds
Hunger without food is bad for health, so is overeating. Investors were hungry for tax-free bonds, especially a big issue to satisfy their demand, like the NHAI one. But, when such an issue came, they were not able to have full of it. It only got subscribed by 0.86 times in the retail investors category.
Such a big supply or say shortage of demand resulted in poor listing for the IRFC bonds. Investors were expecting some healthy listing gains with IRFC bonds after it received a good response and big oversubscription on the first day itself. But, that did not materialise, probably because NHAI offered slightly higher rate of interest or probably many investors subscribed to IRFC bonds to get its listing gains only.
As the NHAI issue got closed on the last day of 2015, IREDA announced slightly higher rate of interest for its issue which is getting launched on Friday next week i.e. January 8th. It will offer a maximum of 7.74% coupon rate for a period of 15 years, which is 0.14% higher than NHAI’s 7.60%. But, at the same time, this issue is AA+ rated, so it can carry a slightly higher rate of interest.
The issue is officially scheduled to close on January 22, but I think it should get fully subscribed much before than that.
Before we analyse it further, let us first quickly check the salient features of this issue:
Size of the Issue – IREDA is authorized to raise Rs. 2,000 crore from tax free bonds this financial year, out of which the company has already raised Rs. 284 crore by issuing these bonds through a private placement. The company will try to raise the remaining Rs. 1,716 crore in this issue.
Rating of the Issue – ICRA and India Ratings have assigned ‘AA+’ rating to the issue, thus suggesting that these bonds carry very low credit risk and high degree of safety regarding timely payment of financial obligations. As all the previous issues were rated ‘AAA’, this is the first issue this financial year which is rated AA+.
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 – As this issue is rated AA+, it can offer interest rates which are 10 basis points (or 0.10%) higher than the rates which a AAA-rated issue could have offered. While NHAI 15-year option carried 7.60% rate of interest, IREDA is offering 7.74% for the same duration. For 10-year period, IREDA issue will have 7.53% rate of interest as against 7.39% which NHAI was offering.
As the NHAI issue did not offer 20-year investment period, IREDA offer will be attractive for the long-term institutional investors like insurance companies or pension funds. For 20-year period, IREDA is offering 7.68% to the retail investors and 7.43% for the non-retail investors.
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.
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. 343.20 crore
Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved i.e. Rs. 343.20 crore
Category III – High Net Worth Individuals including HUFs – 20% of the issue is reserved i.e. Rs. 343.20 crore
Category IV – Resident Indian Individuals including HUFs – 40% of the issue is reserved i.e. Rs. 686.4 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 – IREDA 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.
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. Whether you apply for these bonds in demat or physical form, the interest payment will still get credited to your bank account through ECS.
Also, 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 – 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. 7.53% p.a. for 10 years and 7.74% p.a. for 15 years and 7.68% p.a. for 20 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 – IREDA will make its first interest payment exactly one year after the date of allotment and the date of allotment will be announced just before the listing date. I will update this post as and when it gets announced.
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?
IREDA (Indian Renewable Energy Development Agency), 100% owned by the Government of India, was established in 1987 to promote, develop and extend financial assistance for renewable energy and energy efficiency/conservation projects. As the company has strategic importance in the development of the renewable energy sector, certain special privileges have been provided to the company:
* Regular capital infusion in the company by the Government,
* Sovereign guarantee to the lenders against approximately 58% of IREDA’s total borrowings,
* Rs. 300 crore allocation from the National Clean Energy Fund (NCEF),
* Access to cheaper sources of funding, like these tax-free bonds etc.
Reasons for a lower Credit Rating as ‘AA+’ – Many investors want to know why this issue has been rated ‘AA+’ this time around when last time in February 2014, IREDA issued these bonds and the issue was assigned ‘AAA’ rating by the credit rating agencies. Investors also need to decide whether they should invest in this issue with a higher rate of interest being a AA+ rated issue or wait for HUDCO to announce its interest rates and then take a decision.
So, as the HUDCO interest rates are yet to get announced and we also don’t know when exactly the issue will be launched, it is difficult to guesstimate its interest rates. That is why I can talk only about this issue at this point in time. As far as the rating is concerned, I think higher NPAs and lower yield on its lending portfolio resulting in a fall in the company’s net interest margins (NIMs) are the two primary reasons for its rating downgrade from AAA to AA+.
IREDA was doing well in terms of managing its asset quality a couple of years back. Its Gross NPAs improved from 19.9% in 2007 to 3.86% in 2013. But, in recent times, its financials have taken a hit and its Gross NPAs have again increased to 5.34% by March 31, 2015 and 5.92% by September 30, 2015.
IREDA vs. REC vs. PFC
(Note: Figures are in Rs. Crore, except figures in %)
Moreover, as per ICRA, lending only to the renewable energy sector, low net worth of the company as compared to some of the bigger players in the power financing business and higher NPAs in the small hydro, cogen and biomass segment are a few other reasons for a lower rating.
However, as IREDA is 100% owned and backed by the Government of India and as the government is committed to encourage the use and development of renewable sources of energy, I think the company should be able to improve its financials going forward. Its capital adequacy ratio (CAR) is quite comfortable at 27.40% on September 30, 2015 and its debt-to-equity ratio is expected to be 3.93% after this issue gets completed. IREDA also plans to go public in the next 2-3 years.
Personally, I am quite comfortable investing in this issue as I think IREDA should be able to improve its balance sheet going forward and the government backing will always be there for a company financing the renewable energy space. However, conservative investors, who need to invest only Rs. 10 lakh or less in these tax-free bonds, should wait for the HUDCO issue or NHAI Tranche II.
Application Form for IREDA 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 IREDA tax-free bonds, you can contact me at +919811797407
Dear Mr. Shiv Kukreja,
Thank you for your excellent write-ups on tax free bonds.Thank you also for responding to our queries.
Everything is perfect, but may I humbly suggest the below idea to make your email alerts sent to our inboxes even better.
Your email alerts to our inboxes are most welcome but would be even more appreciated by your readers if for a particular person’s query, the ENTIRE Conversation Thread of both Query & Answer(s) be included in the email. It could put the responses in proper perspective and be understood clearly by all.
Currently, emails are in random chronological order based on blog activity either by readers or yourself.
Thank you once again.
Thanks S.K. for your kind words and the suggestion as well! I’ll discuss it with Manshu and try to get it incorporated, if possible.
Hi Shiv,
Wish you happy New Year 2016 🙂
Thanks for highlighting the new TFB.
I have applied NHAI 10L 2015 Retail Individual category. If i apply IRDA will I be consider as HNI or I can apply under Cat IV?.
Regards
Nagarajan
Thanks Nagarajan for your wishes, you too have a Prosperous New Year! 🙂
Yes, you can apply for IREDA bonds under Category IV and you’ll get a higher rate of interest.
Noted, Thanks lot Shiv.
You are welcome Nagarajan!
dear shiv
i have not received the interest payment for 786pfc28 which was due today
in two of my accounts.is this the case with others also? should i wait?
Hi Dr. Puneet,
I have no idea why there is a delay in interest payment as I do not have my or my family’s investments in this issue of PFC.
Dr.Puneet, I have received it yesterday and you will be getting by today.
George ji: for whatever reason, I have not received it even today (end of 05/Jan)
Regards,
SKR
still i have not received it. alas! there is no easy money
Hi Dr. Puneet, Hi Sandeep,
Are you guys sure you are checking the right bank account for getting the interest credited? If you hold these bonds in a demat form, then you should check your bank account which is linked to your demat account. If that is not the case, then you should contact MCS Limited, the Registrar for the PFC issue.
Hello Shiv/ Dr. Puneet:
I contacted PFC team and they gave me some story of software glitches at their end itself. I explained them that no change have happened at my end – I continue to use same demat and bank accounts.
They have said that they will resolve the problem soon (there are a lot of folks like me) and we should get the money credited soon.
———-
Shiv,
coming to the edits made by you today on investing here v/s Hudco etc., — ”conservative investors, who need to invest only Rs. 10 lakh or less in these tax-free bonds, should wait for the HUDCO issue or NHAI Tranche II.”
a) I am not a conservative investor and the AA rating aspect does not make me uncomfortable;
b) If rating is not an issue, is there any other reason on why I should wait for the other 2 issues? (I do not intend to cross 10 L in any case – don’t have that much cash now or for present year). I acknowledge that interest rates for other 2 issues- which to me are the most important aspect- are not known yet.
Regards,
Sandeep
Hi Sandeep,
I think a higher expected coupon rate or diversification of investment among different companies could be the only other reasons.
i talked at mcs ,they say if interest is not credited to your account it will be redirected to mcs and then they will issue DD.let ‘s see what happens.moreover i had my complaint registered at grievance redressal cell of mcs.
i had a talk with mcs,they say that for the first time the transactions were done via route other than rbi, so there were a lot of rejections .they are resending the amount and we will be getting it in a day or so
i just got it in both of my accounts.sorry shiv for all those botheration.
That’s great !! No botheration Dr. Puneet!
Sir, I have also not received interest on pic tax free bonds which were purchased through ICICI direct. The bond are in d mat account. Pl advise whole to contact and how i.e. at what address etc. What is mcs and what is their contact address or phone no. Dr Puneet please advise. Thanks.
Hi Mr. Handa,
You can contact MCS on 011-41406149 or write a mail at [email protected]
Listing Notice – http://www.bseindia.com/markets/MarketInfo/DispNoticesNCirculars.aspx?Noticeid=%7B026102CE-05AA-44CD-83A7-D8472031101F%7D¬iceno=20130109-10&dt=01/09/2013&icount=10&totcount=21&flag=0
handa ji, contact at number given by mr. shiv.even i got this number from his previous posts.people at mcs are very co operative.dont worry.and inform sos.there is one toll free number as well-1800110660
Dear Shiv,
Thanks for information posted regarding TFB. This will more helpful for
new investors as well as old investors.
Thanks Mr. Sain!
Thanks Shiv … awaiting post updates.
Sure, I’ll try to do that as soon as possible.
Hi Shiv,
I am in 30% tax bracket. Holding some money in Liquid/Debt fund (getting around 8.5 % per annum). Is it good to put the money in Tax free bonds or leave the money in Liquid/Debt fund. Please help.
Hi Sarala,
I won’t be able to take this query here on this forum as it requires analysing your current investments in debt/liquid funds. Please consult your financial advisor for the same or you can avail our one time consulting service – http://www.onemint.com/services/
Is there Cumulative interest option facility for retail investers opting for 10 year term?. Pl. Clarify to the above E-mail id and oblige.
Hi Ramaprasad,
Cumulative interest payment option is not there with any of these bonds/issues.
Hi mr shiv,
Good Morning,
I have old bonds from Ireda 1000.
can apply in this series 1000 in retail category
Hi Raju, Good Evening!
Yes, you can apply for 1,000 bonds as a Category IV retail investor and still earn a higher rate of interest for both your investments.
Hi Shiv,
I had invested in IREDA tax free bonds last year, but now the rating is reduced to AA/+ (from AAA). Do you know what is the possible reason?
Also which other tax free bonds are expected in the the coming months till march 2016?
Hi RS,
1. I’ll try to find out the answer of rating downgrade when I’ll update the post later today.
2. After IREDA issue, at least 2 more issues are expected to come out till March 2016 – HUDCO issue and NHAI Tranche II.
Thanks Shiv.
Is there any indication on the probable interest rates for these two remaining issues?
Hi RS,
It is very difficult to guesstimate the rates of these issues as I don’t know when these issues will precisely get issued.
Dear Shiv:
Best wishes for 2016.
I see that with this new IREDA issue, we have seen six of the seven issues for FY 2015-16 (NTPC, PFC, REC, IRFC NHAI, IREDA).
That leaves only HUDCO – if I am correct.
IREDA has been allowed a total quantum of 2000 crores from which they have already raised 284 crores from private placement and the category IV component is 686.4 crores.
Hudco has been allowed a total of 5000 crores and of this, I believe that they have to raised a 70% component by the public issue – so there must surely be a significant part for category IV.
So, to cut a long story short, should we put money in IREDA or wait for HUDCO?
I am putting this query today so that you can address in your second post on the IREDA (invest/ not invest) aspect.
Sincerely,
SKR
Thanks Sandeep for your wishes, I wish you too have a wonderful 2016! 🙂
I think there are at least 3 more issues left this financial year – this one, HUDCO issue & NHAI Tranche II and if the HUDCO issue details do not come out by Friday, then I think one should go ahead & subscribe to IREDA bonds depending on the total investable funds you have to invest in these bonds.
Hi Shiv
I am wondering what could be the reasons for not investing in these bonds. Is lower rating of AA+ could be one such reason OR the liquidity. Please clarify. Also let us know how easy or difficult is the sell these bonds in case funds are required? Does these bonds usually have buyers?
Also let us know the repercussions of listing these bonds only on BSE (and not on NSE).
Thanks – Manu
Hi Manu,
1. Higher expected interest rates could be the only reason for not investing in these bonds. There is no other reason for me not to invest.
2. AAA rating is definitely better than AA+, but AA+ rating of IREDA or lower liquidity is not a deterrent to me. IREDA is a government company and that is good enough for me to invest in this issue. Moreover, the current government is very much committed to encourage use/development of renewable sources and that is going to benefit IREDA for sure.
3. In case of an emergency, liquidity with these bonds is good enough to liquidate your holdings as a retail investor.
4. I don’t think there is any big negative impact of these bonds not getting listed on the NSE.
IREDA TAXFREE BONDS NOT AVAILABLE ON WBSITE. IT WILL BE HELPFUL IF APPLICATION FORMS ARE MADE AVILABLE AS SOON AS THE ISUU IS DECLARED
Check Here
http://www.ireda.gov.in/forms/contentpage.aspx?lid=1407
Hi Mr. Sharma,
Application Forms are now available for you to download – http://www.fountainheadindia.in/FormPrinting/FrmDirectPrinting.aspx?details=UBx2/PhH8SdJWCAsyn50Jw==&&Reference=EswKb3+CHFOoRzYKsD0K0w==&&Flag=K1byKZlOeCylulT1F2Yh/g==
Thanks Shiv!!
Dear Mr. Shiv Kukreja,
Could you please clarify if the all the recent issues of TFB’s have the ‘step down interest’ conditions in case holdings of investors exceed Rs. 10L.
In case, we had applied in HNI category and were allotted only 200 bonds or so, then if we buy RETAIL CATEGORY BONDS at higher rate from market then will we get full RETAIL INTEREST RATE? I read somewhere that PAN number would be used for clubbing of BOND HOLDINGS to determine RATE OF INTEREST PAYABLE.
Finally, if I have been allocated recent TFB’s of IRFC to the extent of Rs. 7.91L & also have earlier bonds purchased from the market if different/older series and the total holdings exceed Rs. 10L then will IRFC pay me lower interest rate for both old & new Bonds?
Frankly, it is quite confusing to us, please clarify in detail for the benefit of all readers please.
Thank you.
SK, As I know any issue if you exceed holding of 10L you will lose retail benefits except first issues of NHAI and PFC which was issued 3 years back. You can buy 10L each in multiple issues of same co.
Hi S.K.,
1. Buying these bonds of the same issue for more than Rs. 10L will change your category of investor and will make you an HNI investor (High Networth Individual) i.e. Category III investor. Category III investors will get a lower rate of interest by 0.25% per annum. This condition is applicable to all recent issues.
2. If your holding across all Series of the same issue is more than Rs. 10L, then you’ll get a lower rate of interest for all your bonds.
3. You’ll get a higher rate of interest if your holding in each of the issues of the same company is Rs. 10L or less, i.e. you can have bonds worth more than Rs. 10L of the same company and still earn higher rate of interest, if you hold Rs. 10 lakh or less worth of bonds in each of the issues.
Can I revert back to retail category If I sell some bonds and make my holding less than 10 lakhs?
Dear Mr. Shiv Kukreja,
Could you please clarify if the interest(s) received on our Application money (2 interest amounts are displayed at times) are TAX FREE & are EXEMPT INCOME to be shown in ITR.
Hi S.K.,
Interest earned on your application money is not tax-free, it is taxable and investors need to add it to their taxable income as Income from other Sources.
Dear Shiv Ji,
Iam new to BOND Investment and have few queries, please clarify :
1) If I purchase IREDA bond then can i avail tax benefit on investment made apart of the limit 1.5 lakhs under Section 80C, 80CCC & 80CCD? If yes then how much?
2) My wife is a home maker if my wife purchase the IREDA bonds then can i avail tax benefit ?
3) What are the various modes to purchase IREDA bonds ?
Await for your response.
Best Regards,
Rohit Gupta
Hello Rohit,
For the current financial year, i.e., 2015-2016, these bonds cannot be availed for tax benefit.
Regards,
Bharani
Hi Rohit,
1 & 2. Tax-Free bonds do not carry any tax deduction under any section of the Income Tax Act. Only the interest earned of these bonds is exempt from tax.
3. You can buy these bonds in demat form or physical/certificate form.
Dear Bharani/ Shiv JI,
Thanks for the clarification I am very new to Bonds/NCD’s etc.. so dont have knowledge about these. Might be i purchase the bonds very soon and will also be a learning experience for me.
I am not ready to go through DEMAT to purchase the bond, please do let me know how to purchase the physical form of certificate, plz provide me any weblink for the said.
best regards,
Rohit Gupta
Hi Rohit,
To invest in IREDA tax-free bonds in physical form, you need to download the application form from the link pasted above in the post & mail me the scanned copy of the duly filled form on my email id – [email protected]
I’ll do the bidding of your application and provide you the “Bid Id” of your application generated on the BSE platform. You’ll be required to mention the Bid Id on your application form and submit it at one of the designated bank branches in your area along with your PAN card copy, address proof, a cancelled cheque and an investment cheque. For any assistance or query, you can contact me on my number 9811797407
Dear Shiv Ji,
This is an unrelated query. I am a keen follower of your blog since 2012 when I first got interested in Tax Free Bonds. I hold NHAI Tax Free Bonds which were alotted in January 2012 ( NHAI N 1) for Rs 5 lakhs. At that time, the upper limit for investment by retail investors was Rs. 5 lakhs. Recently, I purchased some more bonds of this issue from secondary market, thus exceeding the limit of Rs. 5 lakh. My query is will I get less interest on this additional purchase.
If yes, if I transfer these bonds to my wife who does not hold any of these bonds, will she get the interest originally meant for retail investors, ie 8.20%
Thank you
Vin.
Hi Vin,
There is no “Step-Down Interest” clause with NHAI N1 & N2 bonds. So, even if your holding exceeds 500 bonds, you’ll continue getting 8.20% interest.
Dear Shiv,
I have a similar querry about SBI bonds series N5, issued in March 2011 bearing coupan of 9.95% for retail and 9.45% for non-retail category. Retail category limit was Rs.5 Lacs at the time of the issue.
I own some of these bonds. I am getting 9.95% interest at present. I want to acquire some more bonds due to which the total face value of bonds held by me would exceed Rs.5 Lacs. Will I get 9.95% interest even after the total face value of bonds held by me crosses Rs. 5 Lacs or will I get only 9.45% interest (applicable to non-retail categories) ?
Thanks
Hi TCB,
Yes, you’ll get 9.95% rate of interest even if your holding exceeds 50 bonds. Currently, it is yielding 8.7659% at Rs. 11,525 – http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=SBIN&series=N5
Hi Shiv
If the yield is 8.7659% then it means these SBI Bonds are better than IREDA Tax Free bonds? Are these also Tax Free? Is it better to buy bonds from secondary market because of better post tax Yield than from primary market? Kindly clarify.
Thanks
Manu
Hi Manu,
SBI 9.95% bonds are taxable bonds and hence not better than IREDA tax-free bonds for the investors in the 30% or 20% tax bracket.
Dear Shiv,
Thanks a lot for your reply.
You are welcome TCB! 🙂
Dear Shiv,
Thanks for the update on new issue. Considering the rise in coupon rates of Gilt and AA+ status of IREDA , 15 basis points rise in coupon rate was expected. But considering the low volume, and participation of NRIs the issue may get oversubscribed on day one also. But there will not be the same interest as earlier considering that many short term investors will keep away taking into account the loss made in IRFC. It is also question mark why this bond moved from AAA last time AA+ this time. Where as HUDCO moved up from AA+ to AAA. May be you will have some answers for in the further updates.
Hi George,
I’ll definitely try to find the reason for IREDA’s downgrade, but I don’t think there would be any considerable factor behind it. Also, NRIs are not allowed to invest in this issue. Still, Category I, II & III should get oversubscribed on the first day itself. Let’s see how it goes with the retail investors.
Dear Shiv,
In the above post Mr George mentioned about loss made in IRFC. I am new to Tax-free bonds and have invested 7.9 lakhs in IRFC bonds(2015 issue); was it a wrong decision to commit such a sum? What are your views? Are these bonds not fetching good returns on the Stock Exchange.
Many thanks
Hi Parag,
If your sole purpose of investing in these bonds was to have listing gains, then probably it was a mistake. But, if you want to stay invested for long-term interest income and gradual capital appreciation, then you have taken a right decision by investing in these bonds. These bonds are trading around their intrinsic value as there are more sellers than buyers at the current prices.
thanks for the details, but will invest only after your Update details .. awaiting…
Thanks P.S., I’ll update it by tomorrow or Monday.
Sir, I am waiting for Update..reply soon..thanks..
Hi P.S.,
I have updated the post above, I hope it helps!
Shiv Kukreja ji thanks for updating…
will invest in this for long term like 15 years–to get 7.74% retail.
thank you once again