 "Tax-free bond investors get sweeter deal")
The notification to enable public sector units (PSUs) to launch tax-free bonds (meant only for infrastructure development) has come three months earlier compared to 2012-13. The late notification, coupled with poor investor interest, saw PSUs raise only Rs 25,000 crore through tax-free bonds last year as against approval for Rs 60,000 crore. This financial year, the Centre has allowed 13 PSUs to raise a total of Rs 48,000 crore through such bonds.
The time lag between appointing investment bankers and launching the issue is at least a month, so the early notification is a big positive, said an investment banker.
The Centre has provided for more flexibility in pricing these bonds. It has allowed retaining of a higher coupon for retail investors buying these bonds through the secondary market and has been fairly quick in issuing the notification on tax-free bonds, to give issuers more time to tap the market.
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As the interest earned on tax-free bonds doesn't attract tax like G-secs, the government mandates it must have lower yields.
The government has substantially narrowed the discount that tax-free bonds have to offer to similar-tenure government securities (G-Secs). This year, an issuer can price its tax-free bond just 80 basis points (bps) lower than the reference G-sec, compared to 115 bps in the previous year. For instance, last year, if the average yield on the 10-year government security in the previous two weeks before the launch of the bonds was at eight per cent, the coupon on the tax-free bond of a similar maturity had to be not more than 6.85 per cent. However, this year it can be 7.2 per cent.
“The ministry of finance issued the notification on tax-free bonds earlier this year. Last year, it came very late. Most of the issues surrounding tax-free bonds have been resolved,” said Rajeev Sharma, chairman and managing director, Rural Electrification Corporation. The company has launched a public offering of tax-free bonds, the first to do so, for raising Rs 3,500 crore.
Most tax-free bond issues towards the end of 2012-13 had failed miserably, as the coupon offered was less than seven per cent, with the 10-year G-sec below eight per cent.
“Tax-free bonds weren't that attractive last year, given the low coupon rate. High-yielding debt offerings like non-convertible debentures were popular among investors, as the coupon offered by these was higher on even a post-tax basis. G-Sec yields have hardened in the past few weeks, so this year, tax-free bonds might see renewed interest,”said Ajay Manglunia, head of fixed income at Edelweiss Capital.
So, this year a retail investor buying these bonds from another retail investor through a public issue will not lose out on the higher yield offered during the public issue.
The government has also introduced certain new measures like compulsory 10 per cent reservation for sovereign wealth funds under the private placement route. Up to 30 per cent of the sanctioned amount can be raised through this route. Further, issuers are also allowed to issue these bonds in a 20year tenure. Last year, only India Infrastructure Finance Company was allowed to issue 20-year bonds.
So, this year a retail investor buying these bonds from another retail investor through a public issue will not lose out on the higher yield offered during the public issue. The government has also introduced certain new measures like compulsory 10 per cent reservation for sovereign wealth funds under the private placement route. Up to 30 per cent of the sanctioned amount can be raised through this route. Further, issuers are also allowed to issue these bonds in a 20year tenure. Last year, only India Infrastructure Finance Company was allowed to issue 20-year bonds.