The government has taken a U-turn on its decision to reduce the retail investor limit to Rs 1 lakh in the Rs 3,000-crore, tax-free, bond issue of Rural Electrification Corporation (REC), which opened for subscription on Tuesday.
The Central Board of Direct Taxes (CBDT), part of the Department of Revenue in the Ministry of Finance, in a notification has enhanced the retail limit to Rs 5 lakh. The new notification comes less than a month after it had classified investors investing over Rs 1 lakh as high net worth individuals (HNIs)
“We don't know the reason for the change. The government is not obliged to give any," said Hitesh Shah of AK Capital, one of the merchant bankers for the REC bond sale.
All previous tax-free bond issues — National Highways Authority of India (NHAI), Power Finance Corporation, Housing and Urban Development Corporation and Indian Railway Finance Corporation — allowed retail investors to invest up to Rs 5 lakh. Bond market experts were surprised by the government's move to cap retail investment at Rs 1 lakh and expressed concern over garnering more retail applicants.
The REC issue, the last tax-free bond issue in the current financial year, will close on Monday. The company is aiming to complete the allotment before March 31.
REC is also the first issue to shut out foreign institutional investors, non-resident Indians and overseas corporate bodies from participating. “With so many new restrictions, there were concerns the company won't be able to raise the desired Rs 3,000 crore. Maybe that is what made the CBDT take a U-turn,” said a fixed-income head at a domestic merchant bank, who didn't wish to be named.
The decision to reduce the retail investment limit was aimed at reducing the misuse of retail quota by HNIs. Media reports had talked about a grey market in the NHAI bond issue, in which portions reserved for institutional investors and HNIs were oversubscribed in the first few days. Typically, the retail quota has remained undersubscribed for most of the recent bond issues. Many wealthy investors have used this as an opportunity and routed their applications through the retail quota.