Rural Electrification Corporation (REC) is entering the debt capital market on 25^th February 2013,  with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures. This is company’s second issue in FY13, first being closed in December 2012. Current issue, closing on 15^th March, has a size of only Rs.100 crore, with an option to retain an oversubscription upto shelf limit of Rs.2,483 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.

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

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.

These bonds also have the step down feature, wherein retail investor will get interest of 6.88% p.a. and 7.04% p.a. on Series 1 and Series 2 bonds respectively if he purchases the same from the secondary market post-listing.   

The 15 year (Series 2) bonds are comparable to a 10.91% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This is exactly what is being offered by PFC also, issue of which is currently open.

Although, current rates are 34 basis points or 0.34% lower than those offered in December 2012 (Tranche 1) by REC, its tranche 1 bonds are currently trading with yields of 7.20%-7.32% on NSE. Thus, the additional 50 basis points premium to retail investors is the sole attraction.

Thus, the current bond issue of REC is not attractive due to lower coupon rates being offered, in line with the easing interest rate regime.

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