Why you should grab REC’s tax-free bonds
The government-backed company’s bonds are tax-free and have an attractive coupon rate. A good fit if you’re looking for a safe long-term investment. Issue closes September 23.
Rural Electrification Corporation (REC) is issuing tax-free bonds worth Rs1,000 crore, which, according to reports, the government-backed company expects to be oversubscribed by Rs2,500 crore. This is the first in a series of issues that will hit the market this financial year, as the government has allowed 13 PSUs to raise up to Rs48,000 crore through tax-free bonds. The attraction to these schemes, as indicated in the name, is that you pay no tax on the coupon yield, no matter the amount you invest. So the more tax you’re eligible to pay, the sweeter the deal.
Of the total amount being raised by REC, 40% of the issue is reserved for retail investors and 20% for high net-worth individuals. The issue is open for subscription for three tenures – 10, 15 and 20 years, which will fetch a tax-free coupon rate between 8.26%, 8.71% and 8.62%, respectively. For those in the highest tax bracket (30.9%), the final yield would, therefore, work out to a handsome return of 11.95%, 12.6% and 12.5%, respectively. The issue’s last date is September 23 (though the company’s board has the option to either close it early or extend it).
The bonds will be listed on the BSE and minimum subscription is for five bonds of Rs1,000 each. Being listed on a stock exchange, investors have the option of selling them before the full term, though the price you get in this case will depend on market conditions.
Should you buy?
If you compare the post-tax returns of this investment with other fixed income instruments (FDs, for example), a tax-free bond is far superior. Pankaj Mathpal, CEO, Optima Money, says, ‘REC’s tax-free bond issue is definitely an attractive option for those in the highest tax bracket. Though there are several other tax-free bond issues in the pipeline, it’s difficult to see those going beyond what REC is offering now, given the rates we are seeing currently.’
A research report by ICICI Direct concluded: “We believe the tax free bonds are a good investment option for a fixed income investor given the tax exempt status, good coupon rate and issuance from a government backed company.”
Being a government-owned company, the chance of default is low. Credit rating agencies CRISIL, CARE, IRPL and ICRA have all assigned ‘AAA’ ratings to the issue. This is the best possible rating, indicating “highest degree of safety regarding timely servicing of financial obligations with lowest credit risk”. Moreover, these bonds are secured non-convertible debentures (NCDs), which means that ‘the claims of the Bondholders shall be superior to the claims of any unsecured creditors of the company,’ as per the prospectus, which you can find here.
How to buy
The issue managers for REC’s bond issue are A K Capital Services, Axis Capital, Edelweiss Financial Services and ICICI Securities. You may download the forms directly from their websites. Also note that you need a demat account to subscribe to most new NCDs, as they are to be held in dematerialised form.