IRFCL - Tax Free Bonds

By Geetanjali Kedia

Introduction:

Indian Railway Finance Corporation Limited (IRFCL), the dedicated financing arm of Indian Railways and wholly owned by Government of India, is entering the debt capital market on 6^th January 2014,  with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures.

Issue Details:

Closing on 20^th January 2014, issue has a size of Rs.1,500 crore, with an option in company’s hand to retain an over-subscription upto shelf limit of Rs.7,163 crore, taking total fund-raising to Rs. 8,663 crore. Minimum application amount is Rs. 5,000, and in multiples of Rs, 1,000 thereafter. Allotment will be on first come first serve basis.

Rating: AAA by CRISIL, CARE and ICRA, indicating highest degree of safety regarding timely servicing of financial obligations

Listing: NSE and BSE. Bonds are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Trading in the bonds will necessarily be in the demat form.

What’s on offer:

The current bonds are being offered under two series with features as under:-

*Retail investor defined as resident individual, HUF and NRIs upto limit of Rs. 10 lakh

Allocation ratio: 40% for retail investors, 20% for HNIs, 30% for corporate, 10% for QIB

Rate of Return:

IIFCL’s 15 year (Series 2) bonds carrying 8.65% pa coupon for retail investors, are comparable to 12.52% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. While these rates are higher than company’s previous issues of January and February 2013, they are lower than coupon rates for 15 years tenor of other tax free bonds currently open. HUDCO is offering 8.83% pa while IIFCL 8.73% pa. However, no point applying in these issues, as they have already been over-subscribed by over 4 and 2 times, respectively, implying a near-zero chance of allotment.

National Housing Bank’s (NHB) tax free bond issue has been subscribed by over 4 times in two days itself (subscribed two-times-plus on Opening Day of 30^th December 2013), forcing company to pre-pone closing date to 1^st January from 31^st January 2014 earlier. NHB was the ‘perfect’ tax free bond - carrying highest AAA credit rating, 20 year tenure and attractive coupon rate of 9.01% p.a. However, IRFCL is not offering a 20 year tenor bond.

Since tax free bonds score over company NCDs due to longer duration and higher tax-efficient returns, no point comparing this issue with NCDs of Manappuram, Muthoot and SREI Infra.

Recommendation:

IRFCL bond issue is not the most attractive, due to relatively lower tenure of 15 years. Also, coupon rates not the best. Advise to wait for other tax free bond issues, which are likely to open for subscription over the next couple of months.

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