REC a Navratna company of the Government of India is tapping the markets with the first Tax-free bond issue for the financial year 2012-13. The company has launched its issue for Rs 1,000 crs with an option to retain upto Rs 4,500 crs. The company is rated AAA by CRISIL, CARE, ICRA and India Ratings implying a very high degree of stability and safety. There is a reservation of 40% of the issue size reserved for retail investors which category is upto Rs 10,00,000 (Ten lacs) per application. Readers would remember that upto the previous financial year the limit for retail investors was Rs 5,00,000 (Five lacs).
The bonds are being issued in two tenors of 10 years and 15 years and the interest would be payable on an annual basis on the 1st of December every year. There would be no TDS deducted on these bonds and they may be held in physical form as well as demat form. The coupon rates for retail investors would be 7.72% for 10 year duration and 7.88% for 15 years duration. The rates for investors other than retail would be 50 basis points lower at 7.22% for 10 years and 7.38% for 15 years. The face value of each bond is Rs 1,000 and the minimum lot for application is 5 bonds or Rs 5,000. The subsequent application is in multiples of 1 bond. Allocation in case of over subscription would be on first come first served basis. Readers should remember that the higher rates for retail remain valid only for initial investors or original investors. Anything that is bought in the secondary market automatically is treated as non-retail and the lower rated become applicable.
These bonds make good investment sense as they are tax free and come with a long term period of 10 to 15 years. Even if one is not a highest tax bracket currently the possibility of the tax rate increasing over time makes this an interesting tax planning instrument. Interest rates have been high and everybody including corporate India and the government have been clamouring that interest rates be brought down by the Reserve Bank of India. How soon this would happen is a matter of conjecture and individual opinion, but it would suffice to say that it has to happen sooner or later. Once interest rates reduce, the price at which these bonds would trade would rise to capture the incremental interest income and yield available from these higher interest bearing bonds.
The issue opens on Monday the 3rd of December and closes on Monday the 10th of December. It may be closed earlier but not earlier than 3 days from the date of opening.
I recommend that if you have a need for tax planning application to these bonds makes imminent sense.
