IREDA 8.80% Tax-Free Bonds – February 2014 Issue

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]

The last leg of the current financial year’s tax-free bond issues is all set to begin early next week with IREDA and Ennore Port issues. While IREDA is next in line to issue its tax-free bonds from Monday i.e. 17th of February, Ennore Port issue is also scheduled to open the very next day i.e. Tuesday.

Though the IREDA issue is scheduled to officially close on March 10th, the company has the right to either preclose the issue or extend it depending on the investors’ response.

Before we check out other regular features of the IREDA issue, let us first try to know more about the company and its financials, as only a very few people have heard about this company in the past.

Profile of IREDA

Indian Renewable Energy Development Agency Limited (IREDA) is a wholly-owned government of India (GoI) enterprise and operates under the administrative control of the Ministry of New & Renewable Energy (MNRE). IREDA finances renewable energy & energy efficiency projects and operates a revolving fund for promotion, development and commercialization of new and renewable sources of energy.

The sectors financed by IREDA can be broadly classified under – wind energy, hydro energy, bio energy, solar energy, energy efficiency and conservation, and emerging technologies.

Loans Sanctioned by IREDA (Rs. in crores)

Loans Disbursed by IREDA (Rs. in crores)

Financials of IREDA

During the financial year ended March 31, 2013, IREDA reported profit after tax (PAT) of Rs. 202.65 crore on total revenues of Rs. 729.56 crore as against PAT of Rs. 173.13 crore and revenues of Rs. 534.82 crore during the financial year ended March 31, 2012. Its relative performance during six months ended September 30, 2013 seems reasonably satisfactory with a PAT of Rs. 119.87 crore and revenues of Rs. 444.10 crore.

The company has also been able to improve on its interest rate spread and non-performing assets (NPAs) in the past one year or so.

Now, let us quickly check out the main features of this issue:

Size of the Issue – While IREDA has set the base size of the issue at Rs. 500 crore, the total issue size stands at Rs. 1,000 crore, including the green shoe option of Rs. 500 crore.

Rating of the Issue – Credit rating agencies CARE and Brickwork Ratings (BWR) have assigned ‘AAA’ rating to the issue, which is again the highest rating by any of these rating agencies, indicating lowest credit risk and thus highest safety for the investors’ investments.

Interest Rates on Offer – Due to a jump in the 15-year and 20-year G-Sec yields after the RBI hiked Repo Rate in its monetary policy last month, IREDA issue carries higher rates for these respective tenors at 8.80% per annum. At 8.80%, IREDA’s 15-year option interest rate stands higher than 8.75% NHAI issue was offering and 8.65% IRFC issue carried for 15 years.

NRI Investment – 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 as always each category will have certain percentage of the issue 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) – 20% of the issue i.e. Rs. 200 crore is reserved

Category III – High Net Worth Individuals including HUFs – 30% of the issue i.e. Rs. 300 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.

Listing, Lock-in Period, Premature Redemption – The company has decided to get its bonds listed on the Bombay Stock Exchange (BSE) as well as on the National Stock Exchange (NSE). Like with the past issues, these bonds will also get allotted and listed within 12 working days from the closing date of the issue.

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 stock exchange(s) where they 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 and keep them till maturity. Interest will get credited to your linked bank account through ECS.

Interest on Application Money & Refund – IREDA 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.

Face Value of the bonds & Minimum Investment – The company has decided to keep the face value of these bonds as Rs. 1,000 and the investors will be required to apply for at least five bonds to participate in the offer.

Interest Payment Date – Like many issues in the past, IREDA has not fixed its interest payment date as yet and the first due interest will be paid exactly after one year from the deemed date of allotment.

As far as the safety of the investors’ investments is concerned, I would like to mention it here that MNRE (GoI) has issued a “Letter of Comfort” to IREDA which states, inter alia, that the Ministry has been infusing equity capital into the company to support its business plans and will continue to support it in future as well whenever required. Besides, the Ministry will ensure that IREDA meets its payment obligations on these tax free bonds in a timely manner.

The issue looks reasonably good to me from the long-term investment point of view. The only thing which is required to earn capital gains from these tax-free bonds is a healthy fall in the G-Sec yields.

Application Form of 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