NHB - Tax Free Bonds
By Geetanjali Kedia
Introduction: National Housing Bank (NHB), country’s housing finance regulator wholly owned by RBI and providing support to housing finance institutions, has entered the debt capital market, for the second time this fiscal (after December 2013), on 7th March 2014, with an issue of Tax Free Bonds of face value of Rs.5,000 each, in the nature of Secured Redeemable Non Convertible Debentures.
Issue Details: Issue, closing on 18th March, has a size of Rs.250 crore, with an option in company’s hand to retain an oversubscription upto the residual shelf limit of Rs.1,000 crore. Minimum application is Rs. 5,000 and in multiples of Rs. 5,000 thereafter (as face value is Rs. 5,000), while allotment will be done on first come first serve basis. Being tax-free, the interest does not attract TDS nor do the bonds attract wealth tax. Also, the bonds do not have any lock-in period.
Rating: Highest credit rating of AAA by CARE, CRISIL and ICRA, indicating highest degree of safety regarding timely servicing of financial obligations (same as before).
Listing: Proposed to be listed on NSE, are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Trading lot is one bond and must be necessarily in done demat form only.
What’s on offer: Bonds have three different series under which they are being offered:
| Particulars | Series 1 | Series 2 | Series 3 |
| Tenor | 10 Years | 15 Years | 20 Years |
| Interest Payment | Annual | Annual | Annual |
| Coupon Rate (%) p.a. |
|
| |
| 8.50% | 8.93% | 8.90% |
| 8.25% | 8.68% | 8.65% |
| Tax-effective Yield (%) p.a. (assuming 30.90% tax rate) |
|
| |
| 12.30% | 12.92% | 12.88% |
| 11.94% | 12.56% | 12.52% |
*Retail investors defined as application upto Rs. 10 lakh from resident individuals, HUF, NRIs and QFIs being individual. 40% of the issue is reserved for retail investors, 25% each for HNIs and domestic corporates and balance 10% for QIB.
Rate of Return: The 15 year (Series 2) bonds, carrying the highest coupon rate of 8.93% pa, are comparable to a 12.92% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This is very attractive rate as currently no bank is offering double digit interest rates on long term deposits.
Below is a comparison of NHB bonds with other tax free bonds currently open for subscription:
| Company | Rating | 15 year Coupon pa | 20 year Coupon pa | Subscription* |
| HUDCO | AA+ | 8.98% | 8.96% | 2.4x |
| REC | AAA | 8.88% | 8.86% | 2.1x |
| Ennore Port | AA | 9.00% | 9.00% | 1.4x |
| IIFCL | AAA | 8.80% | 8.80% | 1.2x |
| IRFCL | AAA | 8.88% | NA | 0.5x |
| NHB | AAA | 8.93% | 8.90% | NA |
*till 6th March 2014
Based on the subscription data available on the stock exchanges, only IRFCL issue (scheduled to close today), remains undersubscribed. Thus, essentially, we can compare NHB issue with IRFCL, as probability of allotment in all other is very bleak, allotment being on first come first serve basis.
IRFCL is not issuing 20 year tax free bonds. It is only offering 15 year bonds with coupon rate of 8.88% pa, 5 basis points lower than NHB’s 8.93% pa, for same AAA rating. Also, 8.90% pa coupon for 20 year bonds is attractive.
Recommendation: All those investors who are yet to make their allocation to tax free bonds this year, NHB is probably the last chance. Both 15 years or 20 years bonds are good. Select either, based on your cash flow needs.