The Union government has reduced the cap on subscription by retail investors in the Rs 3,000-crore tax-free bond issue of Rural Electrification Corp (REC) to Rs 1 lakh, from Rs 5 lakh that was allowed for previous such issues.
A notification dated February 14 issued by Central Board of Direct Taxes (CBDT) clearing the issue has said that “any individual investing over Rs 1 lakh will be classified as high net worth individual (HNIs)”.
All previous tax-free bond issues from National Highways Authority of India (NHAI), Power Finance Corp, Housing and Urban Development Corp, and Indian Railway Finance Corp allowed retail investors to invest up to Rs 5 lakh.
Some investors feel the move will unduly help HNIs and institutions garner a better share of the issue. Arun Kejriwal, director, Kejriwal Research and Investment Services said, “The unsubscribed retail portion, which is going to be significant, will be cornered by the larger investors.”
Kejriwal also said the move is an infringement of the market regulator’s territory. “Securities and exchange Board of India (Sebi) has the jurisdiction over public issues of both debt and equity. How can a tax authority or an individual company decide unilaterally who is a retail investor? If at all CBDT wants to change, it has to do it through Sebi.” In 2010, Sebi doubled the limit for retail investors to Rs 2 lakh.
REC’s tax-free bond issue is likely to open on March 5. Ajay Manglunia, senior vice-president, Edelweiss Securities, said, “The move will impact retail participation. Most of the retail investors were investing Rs 5 lakh in these bonds, now if the limit is reduced to Rs 1 lakh you will need much more applications, which could be tough to get."
According to Manglunia even in equity offerings, where the risk is much higher and the issues are relatively smaller, retail investors are allowed to invest up to Rs 2 lakh. “Considering this, the retail quota for bond issues has to be much higher,” he added.
Analysts say the government move followed reports of misuse of retail quota by HNIs.
Media reports had talked about a grey market in NHAI bond issue, in which portions reserved for institutional and High Net worth investors were oversubscribed in the first few days.
Since the retail portion, which had Rs 2,500 crore worth of bonds remained undersubscribed, many richer investors routed their investments through retail investors, reports had said.
The CBDT move is aimed at this practice, according to experts. Even if all applicants subscribe for Rs 1 lakh, the issue will need 7.5 lakh applications to ensure subscription of Rs 750 crore allotted to retail. This looks difficult as even in the NHAI issue which saw huge demand total number of applications was around 5 lakh.
Bankers say this new limit will mean they will have to bring in more investors. Rajender Rautela, director, RR Investors Capital Services, lead manager said, “All debt issues beginning the Shriram Transport NCD issue had Rs 5 lakh as retail limit. NHAI, PFC and IRFC tax free bond issues benefitted from it. Now, with the new limit of Rs 1 lakh fixed for REC, we need three to four times the applications seen in earlier issues to fill up the retail quota.”
