If you missed the recent NHAI and PFC tax-free bonds issues, IRFC and Hudco bonds are here to entice investors. But, the step-down feature will incentivise real investor rather than someone trying to make a quick buck by swiftly selling it in the secondary market

Raj Pradhan

IRFC (Indian Railway Finance Corporation) will offer 8.15% and 8.30% per annum (p.a.) to retail customers (Individual and HUF below Rs5 lakh investment) for bonds with maturity periods of 10 and 15 years, respectively. HNIs (high net worth individuals) and QIPs (qualified institutional investors) will get interest rates of 8% and 8.10% p.a. for same terms.

Hudco (Housing and Urban Development Corporation) will offer 8.22% and 8.35% p.a. to retail investors for bonds with maturity periods of 10 and 15 years, respectively. HNIs and QIPs will get interest rates of 8.10% and 8.20% for the same terms.

Both issues will have a step-down feature. It means that any buyer in the secondary market will only get non-retail (HNI and QIP) investor rate. The flip side is that the seller will have to sell bonds at a little discount. The step-down feature is obviously to encourage real investors to subscribe for the issue instead of someone trying to make a quick buck by swiftly selling it in the secondary market.

The IRFC and Hudco issues will benefit retail investors who invest with the intension to hold the bond till maturity. With the interest rates probably at its peak, retail investors will benefit if they have to sell the bonds after some period when the interest rates in the market goes down enough to compensate the effect of step-down feature. The value of bonds will increase as market interest rates drop.

Both bond issues have reserved 30% for retail investors, 25% for HNIs and 45% for QIPs. IRFC bonds have been rated ‘AAA’ by ratings agencies CRISIL and ICRA, while Hudco bonds have ‘AA+’ rating by CARE. IRFC’s Rs5,000 crore issue and Hudco’s Rs4,685 crore issue open on 27 January 2012. IRFC’s minimum application is for Rs5,000 (five bonds) in both options (10 and 15 years), while the interest payment will be annual.

According to Yogin Sabnis, managing director, VSK Financial Consultancy Services, “Anything above 8% tax-free is a good option. Check the rating of the issue before investing. In the past there was no retail quota and subscription used to get over on the first day itself. Reserving retail quota is good for investors.”
Rural Electrification Corporation (REC) plans to raise close to Rs4,000 crore through tax-free bonds by the end of March.

Recently, NHAI and PFC tax-free bonds were offered for 8.2% and 8.3% p.a. interest for 10 and 15 year bond, respectively. HNI and QIP quota was oversubscribed by 2-3 times. In some places, retail investors were offered money to apply for the issue which was later sold to HNIs or QIPs who wanted to put their hands on more bonds than allowed under their quota.

While there is lot of awareness of 80CCF bonds due to advertising and distributor push, the retail investor was caught unaware about tax-free bonds recently issued by NHAI and PFC. These do not qualify for upfront tax savings, but the interest generated is tax-free as against the 80CCF infrastructure bonds whose interest is taxable. NHAI and PFC tax-free bonds will more than double your money in 10 years and the icing on the cake is tax-free interest. HNI and QIP quota was over-subscribed as there is genuine need for tax savings on generated interest.