The government of India has allowed 13 institutions, including NTPC, NHB and HUDCO, to raise Rs. 48,000 crore through issue of tax free bonds to boost long term infrastructure finance.
The bonds would be in tenure of 10, 15 or 20 years. Retail investors,
qualified institutional buyers, corporates and high net worth
individuals can subscribe to the bonds, the CBDT said in a circular.
The companies which have been allowed to issue bonds include IIFCL (Rs. 10,000 crore), IRFC (Rs. 10,000 crore), National Housing Bank (Rs. 3,000 crore), NTPC (Rs. 1,750 crore) and NHPC (Rs. 1,000 crore).
Besides, National Highway Authority of India (NHAI), Rural Electrification Corp (REC), Power Finance Corp (PFC) and Housing and Urban Development Corp (HUDCO) have been allowed to raise up to Rs. 5,000 crore each in the current fiscal. Ennore Port and Airports Authority of India can issue up to Rs. 500 crore each of such bonds and Cochin Shipyard Ltd. can offer as much as Rs. 250 crore.
The pricing of these bonds would be linked to government securities yields reported by the Fixed Income Money Market and Derivative Association of India, the circular said. Besides, each entity would have to earmark as much as 30 per cent of the issue for Sovereign Wealth Funds (SWFs).
The circular also mandated that the companies would have to raise at least 70 per cent of the aggregate amount through public offerings and 40 per cent of issue have to be reserved for retail investors.
Besides, National Highway Authority of India (NHAI), Rural Electrification Corp (REC), Power Finance Corp (PFC) and Housing and Urban Development Corp (HUDCO) have been allowed to raise up to Rs. 5,000 crore each in the current fiscal. Ennore Port and Airports Authority of India can issue up to Rs. 500 crore each of such bonds and Cochin Shipyard Ltd. can offer as much as Rs. 250 crore.
The pricing of these bonds would be linked to government securities yields reported by the Fixed Income Money Market and Derivative Association of India, the circular said. Besides, each entity would have to earmark as much as 30 per cent of the issue for Sovereign Wealth Funds (SWFs).
The circular also mandated that the companies would have to raise at least 70 per cent of the aggregate amount through public offerings and 40 per cent of issue have to be reserved for retail investors.
Tax-free bonds are back. With just about seven months for this
financial year to close, 13 different institutions have been allowed to
launch tax-free bonds and raise an aggregate of Rs 48,000 crore in FY
2013-14. The bonds would be of the nature of tax free, secured,
redeemable and non-convertible bonds. The interest from these bonds
would not be taxed, the principal invested, however, does not qualify
for any tax deduction.The maximum that each entity may raise has been capped. At
least 70 per cent of the aggregate amount of bonds issued by each entity
shall be raised through public issue while the balance can be through
private placement. This limit however does not apply for issues which
are less than Rs 500 crore.
Features
The investment can be made under four different categories: (a)
Retail Individual Investors (RIIs), (b) Qualified Institutional
Buyers (QIBs), (c) Corporates and
(d) High Net worth Individuals (HNIs). The tenure of the bonds shall be ten, fifteen or twenty years.
Rate of interest
There shall be a ceiling on the coupon rates based on
the reference Government security (G-sec) rate. The reference
G-sec rate shall be the average of the base yield of G-sec for
equivalent maturity reported by Fixed Income Money Market and Derivative
Association of India (FIMMDA) on a daily basis (working day) prevailing
for two weeks ending on Friday immediately preceding the filing of
the final prospectus with the Exchange or Registrar of Companies (ROC)
in case of public issue and the issue opening date in case of
private placement.
For AAA rated issuers, the ceiling coupon
rate shall be the reference G-sec rate less 55 basis points in case of
RIIs and reference G-sec rate less 80 basis points in case of
other investors. However, in case the rating of the issuer entity is
AA+, the ceiling rate shall be 10 basis points above the
ceiling rate for AAA rated entities. further, in case the rating of
the issuer entity is AA or AA-, the ceiling rate shall be 20 basis
points above the ceiling rate for AAA rated entities. 40 per cent of
such public issue shall be earmarked for RIIs.
Restrictions
These ceiling rates shall apply for annual payment of interest
and in case the schedule of interest payment is altered to semi-annual,
the interest rates shall be reduced by 15 basis points. The higher rate
of interest, applicable to RIIs, shall not be available in case the
bonds are transferred by RIIs to non retail investors.
What to do
Tax free bonds suit those in the highest income slab and those who
want to invest a lump sum amount. For someone paying 30.9 percent tax, a
10 percent taxable instrument (say, bank fixed deposit for senior
citizen) yields 6.91 percent post tax. If these tax free bonds are
anything higher than 6.5 percent, parking lumpsum suits well. Wait for
entities to launch issues to look at the interest rates being offered
before investing in them. As most are government backed entities, issues
with lower rating and thus a higher interest
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