REC

Rural Electrification Corporation (REC) has entered the debt capital market on 3^rd December 2012,  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, closing on 10^th December 2012, has a size of Rs.1,000 crore, with an option in company’s hand to retain an oversubscription upto the shelf limit of Rs.4,500 crore. Bonds, rated AAA by CRISIL, CARE, India Ratings (formerly Fitch) and ICRA, indicating highest degree of safety regarding timely servicing of financial obligations, are proposed to be listed on BSE and NSE.

Some features of this issue are:

1. The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10 (15) (iv) (h) of Income Tax Act 1961.
2. There shall be no deduction of tax at source from the interest, which accrues to the bondholders in these bonds irrespective of the amount of the interest or the status of the investors.
3. As per provisions under section 2 (29A) of the Income Tax Act, read with section 2 (42A) of the Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the said Act, capital gains arising on the transfer of listed Bonds shall be taxed @ 10% without indexation.
4. Wealth Tax is not levied on investment in Bond under section 2(ea) of the Wealth Tax Act, 1957.

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

*Retail investors can apply for a maximum of Rs. 10 lakh (limit hiked from Rs. 5 lakh earlier) 

Bonds are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Also, the bonds do not have any lock-in period.

Due to the step down feature of these bonds, a retail investor will get a lower interest rate if he purchases the bonds from the secondary market (post-listing) i.e. he will earn interest of 7.22% p.a. and 7.38% p.a. on Series 1 and Series 2 bonds respectively. Hence, the 50 basis point premium interest will be lost. 

Although the current rates are lower than 8.20% and 8.30% offered in March 2012, when the company had raised Rs. 3,000 crore via similar bonds, the lower rates are in line with the Central bank’s easing monetary policy scenario.

The 15 year (Series 2) bonds are comparable to a 11.40% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. The highest credit rating of AAA from all 4 rating agencies augurs very well for the issue.

Considering the tax free income to be earned from the bonds as also in view of falling interest regime scenario ahead, it is advised to subscribe to the series 2 Bonds with tenure of 15 years.