Infrastructure is a critical component in development of a country. However in India, investment in infrastructure has slowed considerably over past few years owing to relatively high interest rates. With an aim of boosting the stalled investment cycle, the government allowed 13 Public Sector Undertakings (PSU) to raise Rs 48,000 crore through issuance of tax free bonds in the current fiscal. To attract investors, interest component of these bonds has been kept out of the purview of any tax. The coupons would remain at discount to reference government security.
Rural Electrification Corporation Limited (REC) is one among those companies that have been allowed to raise money. REC has been granted permission to collect Rs 6,000 crores by issuing tax free bonds in the current fiscal. The company has already raised Rs 3,440.60 crores by means of its Tranche-I issue and Rs 1,500 crores through 2 private placements. In the Tranche II issue, the company intends to issue tax free bonds worth Rs 250 crores with an option to retain over subscription upto Rs 809.40 crores thus aggregating to Rs 1,059.40 crores.
Company Overview
REC, a 'Navratna' Central Public Sector Enterprise (PSE), was incorporated on July 25, 1969 under the Companies Act 1956. The company enjoys the status of 'Infrastructure Finance' Company. It ranks high on performance among PSEs. REC focuses on meeting credit requirements of the power sector.
Business and Financial Analysis
The main objective of REC is to finance and promote rural electrification projects all over the country. It provides financial assistance to State Electricity Boards, State Government Departments and Rural Electric Cooperatives for rural electrification projects that are sponsored by them. As far as sub-sectors are concerned, REC focuses on companies belonging to power generation and those engaged in power transmission and distribution.
REC follows a healthy business model. In the 3rd quarter of Financial Year 2013-14 (Q3 FY 14), the profit after tax of the company went up by 20% as compared to Q3 FY 13. The net worth of the company also grew by 17% during this time. The outstanding borrowings of the company has also increased by 21% from Rs 1,01,749 crores to Rs 1,22,665 crores. Net Non-Performing Assets (NNPA) ratio stood at 0.32% as on March 31, 2013 which is low considering its high borrowings.
The details of the offering (Tax free bonds) are as follows:
| Issuer |
Rural Electrification Corporation (REC) Limited |
| Offering |
Public Issue by Rural Electrification Corporation Limited of Tax Free, Secured Redeemable Non-Convertible Bonds of Face Value of Rs 1000/- each in the nature of debentures having tax benefits under Section 10 (15)(iv)(h) of the Income Tax Act, 1961. The issue size is Rs 250 crore with an option of retaining over subscription upto Rs 809.40 crore thus aggregating to Rs 1,059.40 crore. |
| Rating |
'CRISIL AAA'/Stable by CRISIL, 'ICRA AAA' by ICRA, "CARE AAA" by CARE & "IND AAA" by IRRPL (formerly Fitch Ratings India Private Limited) |
| Security |
The Bonds issued by the Company will be secured by way of first / pari passu charge on the book debts of the Company, other than those that are exclusively charged/earmarked to any trustee/lender(s) of the Company, and/or any other security as may be agreed between the Company and the Trustee, pursuant to the terms of the Bond Trust cum Hypothecation Deed with a minimum security cover of one time of the aggregate face value amount of Bonds outstanding at all times. Further details pertaining to the Security are more particularly specified in the Bond Trust cum Hypothecation Deed. |
| Face Value |
Rs 1,000 per bond |
| Issue Price |
At par (Rs 1,000 per bond) |
| Minimum Subscription |
5 bonds and in multiples of 1 bonds thereafter |
| Tenure |
Series I: 10 years , Series II: 15 years and Series III: 20 years |
| Coupon rate |
(For Categories I, II, III) Tranche II: Series 1A: 8.19% p.a., Series 2A: 8.63% p.a. and Series 3A: 8.61% p.a.
(For Categories IV) Tranche II: Series 1B: 8.44% p.a., Series 2B: 8.88% p.a. and Series 3B: 8.86% p.a. |
| Interest Payment |
December 1st of every year until the Maturity Date/Redemption Date of the respective Series of Bonds |
| Trustee |
SBICAP Company Ltd. |
| Listing |
BSE; BSE shall be the Designated Stock Exchange for the Issue. The Bonds are proposed to be listed within 12 Working Days from the respective Tranche Issue Closing Date. |
| Depository |
National Securities Depository Limited and Central Depository Services Limited |
| Registrars |
Karvy Computershare Private Limited |
| Issuance |
Both in dematerialised form as well as in physical form as specified by the Applicant (except for Eligible FPIs) in the Application Form |
| Issue Open Date |
February 28, 2014 |
| Issue Close Date |
March 14, 2014 |
| Quota |
Category III - Upto 25% of Overall Issue Size* and Category IV - Upto 40% of Overall Issue Size* |
Category III
(Individuals & HUF applying more than Rs. 10 Lakh) |
The following Investors applying for an amount aggregating to above 10 lakhs across all Series of Bonds in each Tranche Issue:
- Resident Indian individuals;
- Eligible NRIs on a repatriation or non - repatriation basis;
- Hindu Undivided Families through the Karta; and
- Eligible FPIs, being individuals.
|
Category IV
(Individuals & HUF applying upto Rs. 10 Lakh) |
The following Investors applying for an amount aggregating to up to and including 10 lakhs across all Series of Bonds in each Tranche Issue:
- Resident Indian individuals;
- Eligible NRIs on a repatriation or non - repatriation basis;
- Hindu Undivided Families through the Karta; and
- Regional rural banks QFIs not being an individual;
- Eligible FPIs, being individuals.
|
(*on first come first serve basis to be determined on the basis of the bid uploads made with the scheduled Stock Exchanges) (Source: Issue Prospectus, PersonalFN Research)
Well, after reading the details of the tax free bonds (as provided above), there may still be some more questions cropping up, which are answered hereunder:
- Is there a lock-in period for these bonds?
No, these bonds do not have any lock-in period. Post listing, the bonds can also be purchased and sold in the secondary market on the exchange at the prevailing market prices. However, the bonds will be redeemed only on maturity as there are no buy back options.
- Is interest on these bonds Tax Free?
Yes, interest on these bonds is tax free.
- Will TDS be deducted from the interest payment?
These bonds are tax free and hence not subject to TDS.
- Is demat account mandatory to invest in tax free bonds?
No. The bond holder will have an option to take delivery in physical form. In case of Bonds are being issued in physical form, the Company will issue a Consolidated Bond Certificate for investments made under all series of Tranche- 1.
- Are investments in these bonds eligible for deduction u/s 80C?
The sum invested in these bonds is not eligible for any deduction under section 80C, 80CCF or 54EC. The interest on these bonds is tax free. Thus no income tax would be required to be paid, nor will it be subject to TDS. However, capital gains on these bonds are taxable.
Thus, if the bonds are sold within one year of the date of purchase, the short term capital gains arising would be subject to tax at slab rates. For sale after a holding period of one year, the long term capital gains will be taxable at 10% without any indexation benefit.
- Can a minor apply to these bonds?
Yes, a minor can apply for these bonds, but only through a guardian.
- Can one apply in joint names?
Yes, one may apply in a joint name (not exceeding 3). However, the demat account will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein.
- My demat account is in joint name, but I want to apply is a single name?
In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
- Can NRIs invest in these bonds?
Yes. NRIs are eligible to invest in these bonds provided pre-specified conditions are satisfied.
- Is there any preset allotment quota for Category IV investors?
Yes. Of total issue, 40% is reserved for category IV applicants. However, within these limits, the bonds will be allotted on first come first serve basis.
- In whose favour the cheque is to be made?
Resident Applicants should draw Cheques /Drafts in favour of 'REC Tax Free Bonds 2013 - Escrow Account - R'. While Non Residents applicants including NRIs, should draw Cheques /Drafts in favour of "REC Tax Free Bonds 2013 - Escrow Account - NR Repat" Or "REC Tax Free Bonds 2013 - Escrow Account - NR Non-Repat" depending on the nature of investment.
PersonalFN View:
PersonalFN is of the view that REC tax free bond provides a good investment opportunity as the rates offered are quite attractive. Moreover, there's no restriction on a bondholder to hold bonds mandatorily for a particular period of time. Investors may sell or buy these bonds anytime on the exchange, provided that in such a case they are held in a dematerialized mode. Hence investors need not worry much about liquidity in case of immediate need for funds.
Central government holds about two third of REC's total outstanding shares which shores up the confidence in the company. Thrust on Rural electrification in coming years, through various government initiatives, will ensure the healthy growth in loan book of the company. However, one needs to keep an eye on the deteriorating health of state electricity boards, the largest borrowers of REC.
The ticket size has been purposefully kept lower for greater retail participation and thus it is well within the reach of retail investors. Further, the quota of 40% reserved for retail investors enhances the chances of getting allotment. The special rates are being offered to category IV investors. For a person who falls in the maximum tax bracket (and category IV), effective yield (i.e. after factoring in for tax benefits) comes at around 12.2%, 12.9% and 12.8% on bonds with maturity profile of 10 years, 15 years and 20 years respectively.
We believe that REC tax free bond is an attractive offering considering the rating profile of the issue and competitive yield (compared to post tax yield on other fixed income instruments) for those in the maximum tax bracket.
In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200
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