Tax free bonds worth Rs 40,000-cr to hit street this fiscal

Experts believe the bonds will attract investors though they expect the returns to be lower than what was offered in 2013-14

Tax-free bonds worth Rs 40,000 crore are set to hit the market this financial year, with the government having allowed seven entities to raise funds through this route.

Experts believe these will attract investors, though it is agreed that the returns would be lower than what was offered in 2013-14. The Union Budget had announced these for infrastructure projects. These were absent from the market in 2014-15.

The amounts allocated comprise bonds of National Highways Authority of India for Rs 24,000 crore, Indian Railway Finance Corporation for Rs 6,000 crore, Housing and Urban Development Corporation for Rs 5,000 crore, Indian Renewable Energy Development Agency for Rs 2,000 crore, beside Rs 1,000 crore each of bonds from Power Finance Corporation, Rural Electrification Corporation and NTPC.

 

“All the issuances are expected to get fully subscribed. It might not happen on day one but would get a decent response. The public issue portion in these would be 70 per cent and the rest could be done in private placement,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

He added the indications were that the 10-year bonds would get priced around 7.15 per cent, the 15-year ones at 7.4 per cent and 20-year bonds at 7.48 per cent. The first issue might hit the market as early as this month.

According to a government circular, the ceiling coupon rate for AAA-rated issuers of tax-free bonds would be fixed at 55 basis points below the government bond yield for retail investors and 80 bps for other investors.

“Tax-free bonds are going to give consistent returns to investors over 10-20 years. On the other hand, we have a situation where interest rates are going to come down, due to which there will be demand for these bonds. Tax-free bonds are far more attractive compared with bank fixed deposits; there is stability in terms of return for a longer period of time,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories.

A notification by the Central Board of Direct Taxes in its website stated that retail individual investors, qualified institutional buyers, corporates, trusts, partnership firms, limited liability partnerships, co-operative banks, regional rural banks and other legal entities and high net worth individuals  would be eligible to subscribe the bonds.

NTPC would use the tax-free bonds to part-finance its capital expenditure and also use the proceeds of the issue to finance its ongoing and new power projects, including conventional coal-based and solar power projects. The thermal power giant is also looking to acquire stranded power projects.

The power sector’s key financier, Power Finance Corporation, is looking at increasing the sanctioned amount. So is Rural Electrification Corporation, which is the funding agency for the Deendayal Upadhyay Gram Jyoti Yojana — the government’s flagship programme for rural electrification through feeder separation model.

With the NDA government revising the targets for renewable energy to 0.175 mn GW in six years, the sector’s leading financier IREDA is looking to use the proceeds from the bond issuance to help the domestic solar market. The company said these bonds would be used in providing long-term finance and a lower rate of interest to domestic solar power producers.

NHAI would use the proceeds to part-finance its ambitious commitments for the year. The government has targeted awarding of 8,500 km a year over two years, with 10,000 km of roads set to be awarded in the current financial year by the roads ministry.